Form a North Dakota S Corp

Considering launching an S corporation in North Dakota? Opting for S corp status could be a savvy tax strategy for your business. This designation is particularly noteworthy for its tax savings potential, making it a worthwhile consideration for entrepreneurs. For owners of a limited liability company (LLC) in North Dakota, transitioning to an S corp could be a game-changer in managing self-employment taxes. Generally, all profits from an LLC are subject to these taxes. However, with S corp status, you can distinguish between your salary and the business’s profits. This means you only face self-employment taxes on the salary you draw, leaving any additional profits distributed as dividends free from these taxes.

This article aims to guide you through setting up an S corp in North Dakota, highlighting how this tax election can help ensure your business benefits from a more favorable tax treatment, all while maintaining compliance with state regulations.

S Corporation Requirements and Limitations

You’re now familiar with the term S Corporation. As a North Dakota business owner, you’ve probably also heard the term C Corporation before. S Corps and C Corps aren’t different types of business entities. They are ways the Internal Revenue Service defines and classifies your company for tax purposes. 

Becoming an S Corp in North Dakota

While becoming a North Dakota S Corp can be a great, tax-efficient idea for many businesses, the Internal Revenue Service places some limitations on who can choose S Corp status. Before making the election, make sure your company meets North Dakota S Corporation requirements:

• Only one class of stock can be issued
• You may only have 100 or fewer shareholders
• Shareholders have to be U.S. residents, estates, trusts, or tax-exempt organizations
• Your company needs to be an eligible domestic business entity 

If you meet these requirements, then you may want to file Form 2553 and elect North Dakota S Corp status.

What to Know Before Creating a North Dakota S Corporation

Taxes are a common concern for business owners, especially when the time comes to file your corporation income tax return. S corporations are businesses that have limited corporate shareholders but aren’t subject to double taxation.

As we’ve mentioned, a North Dakota S corp is a way to classify your business for tax purposes. Most businesses are legally distinct from their owners and shareholders. An S corp election helps the IRS distinguish which parties associated with your North Dakota business should be taxed at what rate. This includes North Dakota income tax rates.

What’s the Difference Between an S Corp and a C Corp?

There are two main differences between S Corps and C Corps:

• Income from C Corps is taxed both at the corporate level and when distributed to individuals, creating a system of “double taxation.”
• Income from S Corps isn’t taxed until it’s distributed to members or shareholders in a system known as “pass-through taxation.”

North Dakota corporations are treated as C Corps unless and until you make an election otherwise, so be sure you don’t miss any election deadlines. 

What Are the Requirements to Become an S Corp?

When you file Form 2553, the IRS provides instructions on how to complete the form. You’ll need to make the election within a specific time frame depending upon your business circumstances. You should note that you may not need to file the form at the same time you create your North Dakota business entity.

If your entity has been up and running for months or even years, you may be able to make a new tax election at the start of a new tax year or after certain deadlines. If you want to make a new election and miss the deadline, it can seriously impact your tax obligations.

Why apply for S Corp designation?

An S Corp designation can have some benefits for a limited liability company (LLC), like saving on self-employment taxes. For a traditional corporation (C Corp), an S Corp designation can help avoid double taxation. Check out our what is an S Corp page to learn more.

Filing a North Dakota S Corp

A North Dakota S Corp requires a few steps to form, from entity formation to finalizing tax elections. We’ll take a deeper dive into tax elections later in this article. Before you can make a tax election, you’ll first need to form a business entity (either an LLC or a corporation) in North Dakota. We’ll walk you through how to do that.

S-Corp Election Steps for LLCs

For detailed formation steps, see our North Dakota LLC formation guide.

• Step 1 – Choose a Name
• Step 2 – Appoint a registered agent
• Step 3 – Elect directors or managers
• Step 4 – File Formation Documents with the North Dakota Secretary of State
• Step 5 – Apply for S Corp status with IRS Form 2553

S-Corp Election Steps for Corporations

For detailed formation steps, see our North Dakota Corporation formation guide.

• Step 1 – Name Your Corporation in North Dakota
• Step 2 – Appoint Directors
• Step 3 – Choose a North Dakota Registered Agent
• Step 4 – File the North Dakota Articles of Incorporation
• Step 5 – Create Corporate Bylaws
• Step 6 – Draft a Shareholder Agreement
• Step 7 – Issue Shares of Stock
• Step 8 – Apply for Necessary Business Permits or Licenses
• Step 9 – File for an EIN and Review Tax Requirements
• Step 10 – Submit Your Corporation’s First Report
• Step 11 – Apply for S Corp status with IRS Form 2553

File Form 2553 in North Dakota

The next step to creating your S Corp in North Dakota is applying for your Employer Identification Number (EIN). Once you apply for your EIN, you can decide whether you want to make an S Corp election.

What is Form 2553?

Form 2553 is the Internal Revenue Service (IRS) form where you’ll make your tax treatment election. Once you’ve applied for and received an EIN, you’re ready to take the final step to make an S Corp election in North Dakota. That final step is completing and filing Form 2553 with the IRS.

Rules for an LLC

If your North Dakota business is an LLC, you may need to take an interim step and file for C Corp status before you can take the final step of filing Form 2553. Check with your tax professional if this applies to you.

The Pros and Cons of Creating a North Dakota S Corporation

There are many pros and cons of electing North Dakota S Corp status.

Pros

Some pros include:

• Personal asset protection
• Pass-through taxation
• Tax-favorable characterization of income
• Allows for the cash method of accounting

This isn’t an exhaustive list. There are many more positive aspects to creating a tax-efficient North Dakota S Corp that may apply to your business.

Cons

Some cons of electing to become an S Corporation in North Dakota include:

• Formation and maintenance expenses
• Tighter tax qualification obligations
• Strict limitations on stock ownership
• Closer IRS scrutiny
• Less accounting flexibility in allocating income and loss

If you have more questions about weighing the specific pros and cons of S Corp status for your business in North Dakota, you may want to consult an accountant or other tax professional.

S Corp Tax Calculator

The S Corporation tax calculator below lets you choose how much to withdraw from your business each year, and how much of it you will take as salary (with the rest being taken as a distribution.) It will then show you how much money you can save in taxes.

Disclaimer: The savings estimate provided by this tool is for informational purposes only and should not be considered financial, tax, or legal advice. Actual savings may vary depending on individual circumstances and other factors. We recommend consulting with a qualified tax or legal professional before making any decisions regarding your business entity. ZenBusiness, Inc. is not responsible for any actions taken based on the information provided by this tool. Use of this tool does not establish any client relationship with ZenBusiness, Inc.

Recommended: Start a South Dakota Corporation

Get help establishing a North Dakota LLC with S corp tax election

Our formation services can help your North Dakota corporation get the right tax treatment for your business goals and needs. We can assist you through all stages of your business growth — from forming your entity quickly, keeping you compliant, and helping you learn about your tax obligations.