How to Start an S Corp: The Solopreneur's Step-by-Step Guide

Converting to an S Corp is more than just a structural change; it's a strategic move that can save solopreneurs thousands annually by reducing self-employment taxes, particularly for those with net profits of $60,000 or more. Understanding and meeting S Corp requirements, such as calculating a reasonable salary and handling state-specific filings, is crucial for maintaining valuable tax benefits and protecting liability.

Think you need a team of expensive accountants and lawyers to unlock serious tax savings? Most creative professionals and consultants stick with sole proprietorships that cost them $8,000+ annually in unnecessary self-employment taxes, while smart business owners who switch to S Corp status are lowering their tax bills.

What’s an S Corp? It’s a tax status that solopreneurs can elect on top of their existing business entity (like an LLC). It allows you to split your income into two buckets: a reasonable salary and owner’s distributions. You only pay self-employment tax on your salary, which is where the major savings come in.

Learning how to start an S Corp can be straightforward when you have the right guidance. This guide walks you through every step, from evaluating whether S Corp status fits your business to maintaining ongoing compliance. With Lettuce, every step is automated, from formation to ongoing compliance, so you never miss a deadline or opportunity to keep more of your earnings.

Making Your Decision

Before you start filling out forms and filing paperwork, it's worth taking a step back to ensure an S Corp makes sense for your business right now. This planning phase is all about figuring out if you meet both IRS and state requirements, whether the tax savings are worth it, and picking a business name that works. Getting these basics sorted up front saves you from headaches later and ensures you actually benefit from making the switch.

Evaluate If an S Corp Is Right for You

Not every solopreneur needs an S Corp, but the tax savings can be game-changing when it fits. The decision comes down to your profit level, business structure preferences, and long-term goals.

• Your income level matters most: If you’re consistently earning around $60,000 or more in annual profit (that’s revenue minus business expenses), electing S Corp status can save you money in certain situations. The IRS doesn’t set an exact profit threshold, but most business owners see savings once profits comfortably exceed the added payroll and compliance costs. In an S Corp, you pay Social Security and Medicare taxes only on the reasonable salary you pay yourself, while the remaining profit is taken as distributions that aren’t subject to those taxes.
• Avoid paying taxes twice: With a regular corporation, you pay business and personal taxes on the same money. S Corps lets you skip the business tax part and pay personal taxes once.
• Simple requirements for solos: Even though S Corps have rules about shareholders and stock, don't worry. As a solo business owner, you meet most requirements.
• The trade-off: The S Corp vs LLC for solopreneurs debate often boils down to one factor: What do you value? S Corps save money but require more paperwork than a simple LLC. If you value simplicity over savings, stick with an LLC for now.

Know your answer in seconds: Lettuce's simple quiz instantly analyzes your income, business type, and tax situation to show whether S Corp status makes financial sense for your specific situation, no more wondering if you qualify. Take the quiz now!

Understand the S Corp Requirements

Once you've determined that S Corp status fits your business, understanding the specific S Corp requirements keeps your tax-saving status secure and your benefits intact. These IRS rules are straightforward, and staying compliant protects everything you've worked to build.

• Shareholder limits: Your S Corp can have up to 100 shareholders; all must be U.S. citizens or residents. As a solo business owner, you can't bring on foreign investors later.
• Keep ownership simple: You can only have one type of ownership share, eliminating complicated equity arrangements. It’s perfect for solos who want to keep things straightforward.
• Must be a U.S. business: Your business must be officially incorporated in the United States to qualify for S Corp tax treatment.
• Two main tax forms each year: You'll file Form 1120-S (your business tax return) and receive a Schedule K-1 (a document showing your share of business profits/losses for your personal taxes). Think of it like getting a W-2 from an employer, but for your own business.
• State rules vary: Each state has its own S Corp rules beyond the federal requirements, and some states don't even recognize S Corp status.

Prevent compliance issues with Lettuce: Lettuce's system tracks every deadline and automatically adjusts for tax events and updates in the tax code, so you never miss a requirement that could jeopardize your S Corp status.

Calculate Your Potential Tax Savings

Before you commit to S Corp status, running the numbers ensures the tax savings justify the additional complexity. This calculation phase helps you make a data-driven decision rather than hoping for the best.

• Know your profit threshold: Most solopreneurs see meaningful savings once they consistently earn $60,000+ in annual profit. Below that, the setup and compliance costs often outweigh the benefits.
  • *How the savings work: S Corps let you split your business income into two parts: a salary (which pays payroll taxes) and distributions (which don't). For example, if you make $100,000, you might take $40,000 as salary and $60,000 as distributions, only paying self-employment taxes on the $40,000.*
• Estimate your annual savings: A rough calculation shows potential savings of $6,000-$15,000+ annually for businesses earning $100,000-$200,000 in profit. The exact amount depends on your income level and state taxes.
• Factor in the costs: S Corp compliance typically costs $2,000-$5,000 annually in additional accounting, payroll, and filing expenses. Your tax savings need to exceed these costs to make it worthwhile.
• Consider income consistency: If your income fluctuates dramatically year to year, calculate based on your average profitable years rather than your best year.
• Plan for growth: Even if you're right at the threshold now, consider where your business will be in 2-3 years when projecting long-term benefits.

Get precise projections with Lettuce: Lettuce's tax calculator analyzes your specific situation and shows exactly how much you'd save, factoring in all costs and your state's requirements.

Choose Your Business Name (If You Don’t Already Have One)

To elect S Corp status, you need to have a business entity, and you also need a business name for that entity. In addition to the legal paperwork, your business name is how clients will remember and refer you. Pick something that feels authentically you while meeting your state's requirements, and let the system handle the tedious business name availability S Corp checking.

• Start with names you love and check if they're available through your state's business registry, United States Patent and Trademark Office, and local county records, or better yet, let automated tools do the searching for you.
• Reserve your top choice immediately once you find an available name, since most states hold it for 60-120 days while you complete your filing.
• Think like your ideal client when choosing a name. A name that sounds professional and trustworthy makes prospects more likely to hire you over generic competitors.
• Choose your legal structure: You can choose to be formed as a Corporation with an appropriate ending like Inc, Corp, etc., and then make an election to be taxed as an S Corporation. Or you could form an LLC with an appropriate ending like LLC, L.L.C., etc., and then choose to be taxed as an S Corporation. Legal structure protects your rights and sets the legal foundation for your entity. Tax Structure determines how your entity will be taxed and what tax benefits will apply to you and your entity.
• Keep future growth in mind by avoiding names that box you into one service. "Smith Consulting" beats "Smith Logo Design" if you might expand.
• Grab your matching domain while you're at it to keep your online presence consistent with your legal business name.

Setting Up Your S Corp

Once you've done your homework and decided an S corporation is right for you, it's time to make it official. This phase involves filing the necessary paperwork with your state and the IRS and setting up the financial infrastructure your business needs to operate.

The good news? Most of these steps happen simultaneously, and with the right tools, you won't need to navigate government websites or figure out which forms go where. Getting your legal structure and banking in place now sets you up for smooth operations from day one.

File Your Articles of Incorporation and Get Your Federal EIN

Think of the Articles of Incorporation as your business's birth certificate — they legally establish your company in your state. The EIN is like a Social Security number for your business, required for everything from opening bank accounts to filing taxes.

• State filing process: You'll submit your Articles of Incorporation to your state's Secretary of State office, including basic information like your business name, registered agent, and business address. Each state has its forms and fees (typically $50-$500).
• EIN application with IRS: Apply for your EIN through the IRS website using Form SS-4. It's free and typically takes 10-15 minutes if you have all your information ready. You'll get your EIN immediately upon completion.
• Processing timelines: The IRS issues EINs instantly online; however, state processing times vary widely, ranging from a few days to several weeks, depending on your location and the state's workload.
• Watch for common delays: Missing information, name availability issues, or incorrect registered agent details can slow down your state filing. Double-check everything before submitting.

Paperwork-free formation with Lettuce: Lettuce automatically handles all your formation paperwork and state filing fees, so you never have to navigate government websites or wonder if you filled out forms correctly.

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Open a Business Bank Account

Opening a dedicated business bank account isn't just a good idea; it's essential for your S Corp. The IRS requires you to keep business and personal finances completely separate, and mixing them can jeopardize your S Corp status and complicate your taxes significantly.

• Separation of business/personal finances: A business account creates a clear line between your personal spending and business transactions, making bookkeeping, tax prep, and audit protection much simpler. Never run personal expenses through your business account.
• FDIC insurance matters: Make sure your business account is FDIC insured up to $250,000, protecting your business funds just like your personal accounts. Not all fintech business accounts offer this protection.
• Account features to look for: The best business accounts for solopreneurs have no monthly fees, no minimum balance requirements, free transfers, and mobile check deposit. They ideally integrate with your accounting and tax systems.
• Bring your EIN: Most banks require your EIN, Articles of Incorporation, and personal identification to open a business account. Some may also want your operating agreement.

No-fee business account with Lettuce: Lettuce provides an FDIC-insured business bank account and debit card with zero monthly fees, unlimited free transfers, and full integration with your bookkeeping and tax management, all in one easy-to-use platform.

Create Your Corporate Bylaws

Your corporate bylaws is the internal rulebook for how your S Corp operates. Even though you're the only owner, having this document protects your S Corp status, demonstrates legitimacy to the IRS, and provides clear procedures for major business decisions.

• Purpose of corporate bylaws: This agreement establishes corporate governance, decision-making processes, protects owners from liability, and determines how profits are distributed. It proves to the IRS that you're treating your S corporation as a legitimate separate entity, not just a personal tax shelter.
• Key provisions to include: Your corporate bylaws should outline officer and director roles, voting rights, shareholder meetings, procedures for issuing stock, how dividends and distributions are approved, and the process for dissolving the corporation if needed.
• Record-keeping requirements: Keep your corporate bylaws with other important business documents and update them whenever you make significant changes to your business's operations. The IRS may request this information during an audit.
• Don't overcomplicate it: As a solo owner, your corporate bylaws can be relatively simple. You don't need the complex multi-member provisions that larger companies require.

Completing Your S Corp Election

Here's where the magic happens: filing your Form 2553 S Corp election gives your newly formed corporation its tax-saving status. This single form tells the IRS you want to be treated as an S Corporation for tax purposes.

The timing here is critical because missing deadlines means waiting until next year to get your tax benefits, potentially costing you thousands.

File Form 2553 with the IRS

Form 2553 is your official election for S Corporation tax treatment. It's a four-page form, but accuracy matters; mistakes can delay approval for months.

• What you'll need: Business name, EIN, incorporation date, tax year, desired effective date, and your signature as sole shareholder.
• Choose your effective date carefully: Most solopreneurs select the earliest possible date to maximize first-year tax savings, but you can also elect to start S Corp status at the beginning of the next tax year.
• Where to submit: Mail the completed form to the IRS Service Center for your state, or fax it if you need faster processing. Each state has a different mailing address.
• Wait for approval: The IRS typically responds within 60 days with an approval letter. If you haven't received confirmation after 60 days, contact the IRS to check your election status.

Automatic Form 2553 filing with Lettuce: Lettuce prepares and files Form 2553 automatically, ensuring accuracy and proper submission. You'll get confirmation when approved.

Meet Critical Election Deadlines

S Corp election timing is one of the easiest things to mess up — and one of the costliest mistakes. Miss your deadline by even one day, and you'll wait until next year to start saving on taxes.

• 75-day rule for new businesses: If you're forming a brand new business, you must file Form 2553 within 75 days of incorporation to get S Corp status for your first year. Day 1 is when you file your Articles of Incorporation, not when they're approved.
• March 15th deadline for existing LLCs: Already have an LLC and want to convert to S Corp status? You must file Form 2553 by March 15th to get S Corp treatment for the current tax year. Miss this date, and your election won't take effect until January 1st of the following year.
• Late election relief options: The IRS offers reasonable cause relief if you miss the deadline due to circumstances beyond your control. You'll need to file Form 2553 with a letter explaining why you're late and requesting relief.
• Mid-year election considerations: If you file after March 15th but get late election relief or start a new business mid-year, your first S Corp year might only be partial. You'll need to carefully track which income and expenses fall under which tax treatment.

Stop the calendar panic. Lettuce monitors all critical S Corp deadlines and files your Form 2553 at the optimal time to maximize your first-year tax savings. You'll never miss a filing window or lose months of S Corp benefits.

Complete State S Corp Election

Your federal S Corp election doesn't automatically apply at the state level. About half of U.S. states require a separate state S Corp election form, while others recognize your federal status automatically. A few states don't recognize S Corps at all for state tax purposes.

• Different forms, different deadlines: Each state has its own election form and deadline, which may not align with the federal March 15th or 75-day windows. Missing your state deadline means losing state-level tax benefits even if your federal election is approved.
• Not all states play along: Some states, like New York City, don't recognize S Corp status for state taxes, and states without income tax (like Texas and Tennessee) make S Corp elections irrelevant at the state level.

State filing automation with Lettuce: Lettuce automatically handles all required state-level S Corp elections based on where your business is registered, ensuring you get both federal and state tax benefits without researching complex state requirements.

Staying Compliant (and Saving Money)

Your S Corp is officially formed and elected; now comes the part that actually saves you money. Ongoing compliance is where your tax savings happen, but it's also where many solopreneurs get overwhelmed or make costly mistakes.

The good news? Once you establish your systems, these requirements become routine. This section covers the essential ongoing tasks that keep your S Corp compliant with IRS rules while maximizing your tax benefits throughout the year.

Set Up Payroll for Yourself

As an S Corp owner, you're required to pay yourself a W-2 salary before taking any distributions. This isn't optional; it's an IRS requirement that protects your S Corp status.

• Why you must pay yourself a salary: The IRS requires S Corp owners who actively work in their business to take "reasonable compensation" as W-2 wages. You can't just take all your income as distributions to avoid payroll taxes; that's a red flag for audits.
• Reasonable salary determination (60/40 rule): A common framework is the 60/40 split: roughly 60% of your profit as salary and 40% as distributions, or vice versa. For example, if your business nets $100,000, you'd take about $60,000 as salary and $40,000 as distributions. The exact split depends on your industry, role, and what similar positions earn.
• Payroll frequency considerations: Most solopreneurs run payroll quarterly to minimize processing while staying compliant. You can also do monthly or bi-weekly, but quarterly is simplest and meets IRS requirements.

Automated reasonable salary calculation with Lettuce: Lettuce automatically calculates your reasonable salary using the proven 60/40 framework and processes your payroll, ensuring you're always IRS-compliant without the guesswork.

Pay Your Quarterly Payroll Taxes

You pay less in taxes as an S Corp, but you do still need to pay them. Understanding what gets withheld and when it's due keeps you compliant and penalty-free.

• FICA withholding (Social Security and Medicare): You'll pay 7.65% as the employee and 7.65% as the employer (15.3% total) on your salary. This is where the savings come from. You only pay this on your salary instead of all your profit, as sole proprietors do.
• Federal and state income tax withholding: You'll withhold federal income taxes based on your tax bracket, and most states require income tax withholding plus state unemployment insurance (SUI) contributions.
• Form 941 filing: Every quarter, you'll file Form 941 with the IRS, reporting wages paid and taxes withheld. This form is due by the last day of the month following each quarter.

Taxes automatically set aside and paid with Lettuce: Lettuce calculates all payroll taxes, sets the money aside from each payment you receive, and files Form 941 quarterly on your behalf. You never manually calculate withholdings or miss a tax deadline.

Handle Your Owner’s Distributions

Distributions are where your S Corp tax savings really shine. Unlike salary, distributions aren't subject to payroll taxes, just regular income on your personal tax return.

• How distributions differ from salary: Your salary is W-2 income subject to payroll taxes (15.3%). Distributions are your share of business profits that pass through to your personal return without additional payroll taxes. Same income, lower taxes.
• When and how to take distributions: You can take distributions whenever you want after you've paid yourself a reasonable salary for the period. Transfer money from your business account to your personal account and categorize it as an owner’s distribution in your books.
• Documentation requirements: Track every distribution with proper documentation showing the date, amount, and that it's classified as a distribution. Clean records protect you if the IRS questions your salary-to-distribution ratio.

Unlimited distributions with Lettuce: Once Lettuce has set aside money for your salary and taxes, you can transfer remaining profits to your personal accounts as distributions whenever you need them, no limits, no waiting.

File Your Annual Tax Returns

Your S Corp doesn't pay corporate taxes but still needs to file a tax return reporting business activity. This return generates the K-1 that flows through to your personal taxes.

• Form 1120-S requirements: Every S Corp must file Form 1120-S annually, reporting business income, deductions, credits, and how profits were distributed. This return is due March 15th.
• Schedule K-1 preparation: Your Form 1120-S generates a Schedule K-1 showing your share of business income, deductions, and credits. You'll attach this K-1 to your personal Form 1040, where you actually pay taxes on business profits.
• Extension options: If you need more time, file Form 7004 to extend your 1120-S deadline to September 15th.

Annual business tax prep with Lettuce: Lettuce prepares and files your complete Form 1120-S and Schedule K-1 using the money-saving best practices you've followed all year. Plus, you get complimentary tax prep for your personal return, ensuring everything integrates seamlessly.

Maintain Corporate Formalities

The IRS wants to see that you're treating your S Corp like a real business, not just a tax shelter. Maintaining proper formalities protects your S Corp status and limits your personal liability.

• Separate bank accounts: Never mix personal and business finances. Every business transaction must run through your business account. Commingling funds is one of the fastest ways to lose S Corp protections.
• Record keeping requirements: Maintain organized records of all business transactions, contracts, invoices, receipts, and tax documents. The IRS can audit up to three years back, so keep everything accessible and well-organized.
• Annual state reports: Most states require an annual report filing to maintain your LLC's good standing, along with a filing fee (typically $50-$500). Miss this filing, and your state can dissolve your LLC, ending your S Corp status.

Lettuce monitors all compliance deadlines, maintains proper record separation, handles annual state filings, and ensures your S Corp documentation meets IRS requirements — all automatically.

Common Solopreneur S Corp Challenges & Solutions

Even with the right systems in place, S Corp owners occasionally run into questions about how to handle specific situations. Here are the most common challenges solopreneurs face and practical solutions to address them.

Frequently Asked Questions (FAQs) About Starting an S Corp

How much does it cost to start an S Corp?

Formation costs vary by state but typically include $50-$500 in state filing fees, plus potential costs for registered agent services ($100-$300/year) and legal/accounting help ($500-$2,000). With Lettuce, formation costs are covered — you pay no upfront filing fees.

How long does it take to form an S Corp?

State processing times for LLC formation range from a few days to six weeks, depending on your state. The IRS typically approves Form 2553 (S Corp election) within 60 days. With Lettuce's automated process, most of the heavy lifting is done for you while you wait for government approvals.

Can I convert my existing LLC to an S Corp?

Yes! If you already have an LLC, you don't need to form a new entity. Simply file Form 2553 with the IRS to elect S Corp tax treatment. Remember the March 15th deadline if you want S Corp status for the current tax year.

What's the minimum income needed to benefit from an S Corp?

Most tax professionals recommend S Corp status once you're consistently earning $60,000+ in annual profit. Below this threshold, the compliance costs and additional complexity often outweigh the tax savings.

Do I need a separate business bank account?

Yes, it's required. The IRS expects complete separation between personal and business finances for S Corps. Mixing funds can jeopardize your S Corp status and personal liability protection.

What happens if I miss the S Corp election deadline?

If you miss the March 15th deadline for an existing LLC or the 75-day window for a new business, you'll typically have to wait until the following tax year for S Corp status to take effect. The IRS does offer late election relief in some cases, but approval isn't guaranteed.

Can I have employees as an S Corp?

Yes, S Corps can have employees, but it adds complexity to payroll and compliance. As a solopreneur, most find that contractor relationships work better than hiring W-2 employees. If you do need to hire employees, Lettuce Premium supports payroll for multiple employees.

How much can I save in taxes with an S Corp?

Tax savings vary based on your income level, but solopreneurs typically save $6,000-$15,000+ annually. Someone earning $100,000 in profit might save around $8,000 per year compared to operating as a sole proprietorship. Lettuce users save an average of $10,000 annually.

What's a reasonable salary for an S Corp owner?

"Reasonable salary" means what someone with your skills and responsibilities would earn in your market. A common starting point is the 60/40 rule (60% of profit as salary), but the right amount depends on your industry, role, and local market rates.

Can I run an S Corp from any state?

You can form an S Corp in any state, but a few places (like New York City) don't recognize S Corp status for state tax purposes. Additionally, states without income tax (Texas, Tennessee, Florida, etc.) mean you only get federal tax benefits.

What if my income fluctuates throughout the year?

S Corps work fine with variable income. Set your salary based on annual projections and run payroll quarterly to smooth out fluctuations. You can adjust your salary each quarter if needed and take distributions whenever profit is available. Lettuce automatically manages this based on your actual income.

Do I need to hire a CPA or accountant?

While many S Corp owners work with CPAs, it's not required if you have the right systems in place. You do need accurate bookkeeping, proper payroll processing, and timely tax filings, all of which Lettuce handles automatically. Plus, Lettuce includes professional tax support when you need it.

Your S Corp Journey Starts Here

Starting an S Corp is more straightforward than most solopreneurs think, and the tax savings are real. With the right systems handling formation, payroll, and compliance automatically, you can focus on your business while keeping thousands more of what you earn each year.

Ready to make the switch? Lettuce handles everything from formation to ongoing tax management, backed by our Lettuce-Back Guarantee: you'll meet or exceed your estimated yearly savings, or get a full refund, hassle-free.

Get started today and join thousands of solopreneurs who are keeping more of their hard-earned income.