File a Wyoming S Corp

For entrepreneurs in Wyoming looking to optimize their tax strategy, the S corporation tax status presents an appealing avenue. Perhaps you’ve come across the term “S corp” and are curious about what it entails and how you can establish one in the Cowboy State. This detailed guide is designed to shed light on the intricacies of S corporations, providing a clear roadmap for starting your Wyoming S corp. From understanding the foundational aspects of an S corp to navigating the specific steps required for establishment in Wyoming, this guide aims to demystify the process for you.

Requirements and Limitations of S Corporations

Before you get too far in your planning, know that there are a few S corp filing requirements and limitations you should know. Specifically, to qualify for S corporation status, an entity must:

• Be a domestic LLC or corporation
• Not be an ineligible corporation, such as certain financial institutions, insurance companies, and domestic international sales corporations
• Have only one class of stock
• Have no more than 100 shareholders or members
• Have only allowable shareholders or members, which includes individuals and certain trusts and estates. The shareholders/members can’t be partnerships, corporations, or non-resident aliens. A nonresident alien is an alien who hasn’t passed the green card test or the substantial presence test.

Not all business entities are eligible for S corp election. However, if your business entity meets these requirements, read on to learn about applying for S corp election. 

Filing as an S Corp in Wyoming

To apply for S corporation status, you’ll need to create either an LLC or a C corporation if you haven’t already done so. Then, you’ll file an election form with the IRS.

Wyoming-Specific Considerations

In an S corp, the business itself doesn’t usually pay taxes on income at the federal level. But what about state income taxes?

Wyoming is an extremely tax-friendly state in that it has no corporate income tax and no personal state income tax. However, other standard taxes, such as sales tax, will still apply.

“S corporation” refers to a tax election a limited liability company (LLC) or a corporation can make. For an LLC, filing as an S corp could provide the owners (called “members” in an LLC) with savings on self-employment taxes. For C corporations (the default form of corporation), S corp status is a way to avoid double taxation.

S-Corp Election Steps for LLCs

For detailed formation steps, see our Wyoming LLC formation guide.

• Step 1 – Choose a name 
• Step 2 – Appoint a registered agent
• Step 3 – File Wyoming Articles of Organization 
• Step 4 – Create an operating agreement
• Step 5 – Apply for an EIN
• Step 6 – Apply for S Corp status with IRS Form 2553

S-Corp Election Steps for Corporations

For detailed formation steps, see our Wyoming Corporation formation guide.

• Step 1 – Decide on a Wyoming corporation business name
• Step 2 – Choose a Wyoming registered agent
• Step 3 – File the Wyoming Articles of Incorporation
• Step 4 – Hold the first meeting and choose directors for your Wyoming corporation
• Step 5 – Create corporate bylaws and a shareholder agreement
• Step 6 – Issue shares of stock for your Wyoming corporation
• Step 7 – Obtain an EIN and review Wyoming tax requirements
• Step 8 – Open a business bank account for your Wyoming corporation
• Step 9 – Apply for S Corp status with IRS Form 2553

File form to apply for S corp status

Submit the form to apply for S Corp status. Once your LLC or C corporation formation is approved by the state, you need to file Form 2553, Election by a Small Business Corporation, with the IRS to get S corp status. 

The IRS requires that you complete and file your Form 2553: 

• Within 75 days of the formation of your LLC or C corporation, or no more than 75 days after the beginning of the tax year in which the election is to take effect

OR

• At any time during the tax year preceding the tax year the election is to take effect.

Here’s an additional important note for LLCs wishing to file as an S corp: If your LLC is past the 75-day election deadline, you’ll also need to file Form 8832, Entity Classification Election, to elect to be taxed as a corporation. Then you would file both Form 8832 and Form 2553 together via USPS-certified mail. 

Note that all of the shareholders/members must sign the consent statement portion of the form. For more information on when and how to file Form 2553, visit the IRS website.

Pros and Cons of Filing as an S Corp

While S corp classification does come with a number of benefits for some businesses, making this election isn’t necessarily right for all businesses. So, be sure to carefully weigh the various pros and cons before deciding how you want to move forward. Consult a tax professional about whether the S corp election would be best for your business.

Advantages of S Corp Status for LLCs

The advantages of filing as an S corp for an LLC aren’t exactly the same as they are for C corporations. Let’s first examine the advantages for LLCs.

A traditional LLC already has pass-through taxation by default, so the benefits of S corp election for an LLC have to do with self-employment taxes. This takes some explanation, but for certain LLCs, it could save a lot in taxes.

Explanation of Self-Employment Taxes

The owners of a standard LLC are considered self-employed. They’re compensated by receiving their share of profits from the LLC, but they can’t be employed by the LLC. Being self-employed means paying self-employment taxes (Social Security and Medicare, which add up to about 15.3%) on all profits they receive from the LLC. This is more than the taxes they’d pay when working for someone else because their employer would pay part of them.

Dividing Salary and Profits

When the members make an S corporation election, they can be compensated in two ways, by receiving their share of the profits and by being paid as an employee. Once they do that, they only pay Social Security and Medicare taxes on their salary and not the profits they receive as a business owner. Depending on factors such as how profitable your company is, the savings could add up to a lot. (Of course, the members will still pay tax on income and all other applicable taxes on their share of the profits.) Money paid out as salary is a tax-deductible expense for the business. 

Reasonable Compensation

One caveat to this is that the IRS expects you to pay yourself a “reasonable salary” as an employee. If they didn’t, you could pay yourself an annual salary of nine bucks and avoid contributing anything to Social Security and Medicare. 

So, what is “reasonable compensation” to the IRS? The instructions on Form 1120-S read, “Distributions and other payments by an S corporation to a corporate officer must be treated as wages to the extent the amounts are reasonable compensation for services rendered to the corporation.” While the terms aren’t completely defined, the IRS seems to consider “reasonable” to be something akin to what others in your field are earning for the same work.

If the IRS determines that your salary isn’t reasonable, it can reclassify your non-wage distributions (which are not subject to employment taxes) to wages (which are subject to employment taxes). Several court cases have supported the IRS’s right to do this.

Advantages of S Corp Status for C Corporations

If you have a C corporation (the default form of corporation), filing as an S corp does have its advantages:

Pass-Through Taxation

One big disadvantage for C corporations is “double taxation.” When the corporation makes a profit, the IRS taxes those profits on the corporate level. But when those profits are ‌distributed to the individual owners (shareholders) as dividends, they’re taxed a second time on the shareholders’ personal tax returns.

But when a C corporation qualifies to be an S corp, those profits are only taxed at the individual level. The business itself isn’t taxed on them. This is called “pass-through taxation,” and it’s how sole proprietorships and general partnerships are taxed. LLCs are also taxed this way unless they choose to be taxed as a corporation. For more information please see: What is a Sole Proprietorship?

We need to add here that, since the 2017 Tax Cuts and Jobs Act, the corporate tax rate has been lowered to a flat 21%. So, the disadvantages of double taxation aren’t as severe now as they were. Read the pass-through taxation definition for more.

Writing Off Losses

Just as business profits pass through to the owners of an S corp, so do the losses. Unlike the shareholders of a C corporation, S corp owners can write off the company’s losses on their personal income tax statements. 

This can help offset their income from other sources and can be helpful if the corporation loses money in its early years. Still, make sure you’re aware of ​​the IRS’s shareholder loss limitations.

Qualified Business Income Deduction

Under the Tax Cuts and Jobs Act, some business owners with S corp election may be able to deduct up to 20% of their qualified business income. This deduction isn’t available to C corporation shareholders.

Qualified business income (QBI) is basically your share of the company’s profits, or, as the IRS puts it, “QBI is the net amount of qualified items of income, gain, deduction and loss from any qualified trade or business, including income from partnerships, S corporations, sole proprietorships, and certain trusts.” The IRS website has a detailed explanation as to what is and is not included in QBI. There’s an income threshold that, if exceeded, may reduce your QBI (see the IRS website for details).  

Disadvantages of S Corp Status for LLCs

Having an LLC with S corp status can have some drawbacks over an LLC without S corp election:

Stricter Requirements 

As we listed above, S corps have more qualifications than a standard LLC or C corporation. An S corp can have no more than 100 members, and none of them can be partnerships, corporations, or non-resident aliens. A traditional LLC doesn’t have these limitations.

More IRS Scrutiny

Because of the above restrictions and the requirements about paying yourself a “reasonable salary,” the IRS usually monitors LLCs filing as S corps more closely. That could mean a greater chance of being audited, even if you follow the law to the letter. In fact, S corp owners may want to observe some of the same formalities that C corporations do (such as regular meetings and extensive record keeping), even if they’re not legally required to.

Additional Accounting and Bookkeeping

Having an LLC that files as an S corporation likely means more paperwork. If you don’t already have to do payroll for your business, being an owner-employee means that you’ll have to do so. Your taxes will be more complex, as well.

With these added complications, you’re likely to have higher administrative costs. You may find that you need an accountant, bookkeeper, and/or a payroll service or software.

Disadvantages of S Corp Status for C Corporations

S corp status also has its pitfalls:

Limited Number of Shareholders

As we said, an S corp can’t have more than 100 shareholders, while a C corporation has no such restriction. That limitation could be an issue later if the corporation expands.

Limited Types of Shareholders

All S corp shareholders must be U.S. citizens or certain trusts or estates. That might limit your ability to expand internationally. You also can’t have partnerships or corporations as shareholders. C corporations don’t have these limitations.

One Class of Stock

One way corporations attract investors is to offer preferred stock. C corporations have this option, but the IRS doesn’t allow it for S corps.

More IRS Scrutiny

Because of the extra restrictions S corps have, the IRS watches them more meticulously to see if they’re in compliance. In other words, your corporation is more likely to get audited.

We can’t stress enough how important it is to have tax guidance about your specific situation from a qualified tax professional. An accountant with S corp experience should be able to make sure you stay in compliance with the IRS, and they may also be able to help you find additional tax savings.

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.

Interested in the pros and cons of an S Corp in another state? Check out these resources below:

• File a West Virginia S Corp
• File a South Dakota S Corp

Get help establishing a Wyoming LLC with S corp tax election

Forming a business can be complicated, but we’re here to make it as easy for you as possible.

When you’re ready to make your move into entrepreneurship, we can help you form a Wyoming LLC with an S corporation designation and provide you with valuable support for all of your business needs moving forward. Contact us today to get started.