Partnerships and S corporations share some fundamentally similar features. Both business structures pass on taxes from business income to their owners and shareholders. Partnerships do this because there is no corporate entity, while S corps meet certain requirements allowing them to pass on these income taxes. Often, an S corporation business structure can be seen as more beneficial than a partnership because the private corporate entity of an S corp takes on much of the liability of doing business.
The first step in changing a partnership to an S corp is to file articles of incorporation with the secretary of state's office for the state in which you are doing business. Partnerships are not incorporated, which is why the liability burden is higher on the business owner, whereas a corporation takes on its own liability burden as a private entity. Articles of incorporation include information on the corporation's purpose, name and address of the business and how much stock the corporation will issue. The Internal Revenue Service's rules state that S corporations cannot have more than 100 shareholders, and the articles of incorporation should reflect this.
When incorporating, a former partnership is obligated to file for a new employer identification number, or EIN, with the IRS. The EIN is a tax-related number used by the IRS for the purposes of collecting payroll taxes from corporations. A business owner can apply for the new EIN by completing IRS Form SS-4, "Application for Employer Identification Number," and faxing or mailing the form to her state's IRS office. An employer identification number can also be obtained through an online application at the official IRS website or by calling 1-800-829-4933.
Once incorporated, a business can go about becoming an S corporation by completing and filing IRS Form 2553, "Election by a Small Business Corporation." This form contains the names of S corp shareholders who must sign the form in order to show that the election to become an S corporation is mutually agreed upon by all shareholders. Form 2553 must be filed with your state's IRS office.
A business must fulfill a few extra requirements in order to experience the tax benefits allowed an S corporation. S corporations must be domestic corporations that issue only one type of stock instead of multiple types (e.g., common, preferred, etc.). Shareholders must be individuals, although certain types of estates and trusts are allowed as well.
S corporations report income tax to the IRS with Form 1120S. Employment taxes are reported through Form 941. Shareholders report taxes on income from their share in the S corp on Schedule E of Form 1040.
