A sole proprietor may benefit from converting to an S Corporation. While a sole proprietor is personally liable for business debts, shareholders of an S Corporation are not liable for the corporation’s liabilities. Neither business structure pays income taxes directly; instead, sole proprietors and S corporation shareholders both declare income earned by the business on their personal tax returns.
File for corporate status. To qualify as an S corporation, a business must first incorporate. Incorporation requirements vary, depending on the state where the business is located. Generally, to incorporate you must choose individuals to serve on the board of directors; check the availability of your corporation’s name in your incorporating state; draft articles of incorporations and bylaws; file the relevant documents with the Secretary of State where your business is located; and open a separate bank account for the corporation.
Apply for an Employer Identification Number (EIN) if you do not have one. An EIN is a federal tax identification number that every corporation must have, whether or not the business plans to hire employees. A corporation can obtain its EIN immediately by applying online through the IRS website. An EIN can also be obtained by calling 800-829-4933 or by faxing or mailing a completed Form SS-4 to the IRS. The instructions for Form SS-4 will tell you where to fax or mail your completed form.
File for S corporation status with the IRS. You must file a completed Form 2253 with the IRS to be recognized as an S corporation. The form must be filed within two months and 15 days from the beginning of the first year when the business is to be treated as an S corporation.