How to Start an S Corportation With a Personal Line of Credit

by Terry Masters

A start-up corporation can be funded by infusions of cash from the owners, who are known as shareholders. The law does not place restrictions on the places where an owner can obtain the money to start a business. It is perfectly legitimate for an owner to incur personal debt to capitalize his ownership interest in a business or to lend a new business money that the owner expects to be paid back once the business becomes profitable. Keep in mind, however, to start an S corporation, you must first register the business as a regular corporation under state law. An S corporation is a corporation that elects to pass corporate income, losses, deductions and credit through to the shareholders for federal tax purposes.

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Step 1

File articles of incorporation with a state business registrar. Go to the website of the secretary of state's office or comparable office where you want your corporation to be headquartered. Download an articles of incorporation template or use the state's electronic filing system, if available. The articles will require you to indicate a unique business name that is not already in use in the state and the address of the corporation. Also provide the name and address of a registered agent with a physical location in the state who can accept official mail on behalf of the corporation. Indicate the initial number and value of shares that the corporation is authorizing. Sign and date the articles. File the articles with the state registrar by following the instructions included with the form and paying the appropriate filing fee. The corporation comes into existence as soon as the state accepts the paperwork.

Step 2

Obtain an employer identification number, or EIN, from the Internal Revenue Service. Go to the IRS website. Use the online EIN application system or download a copy of IRS Form SS-4. Fill out the form according to the instructions. Indicate that the entity type is a corporation. Sign and date the form. Submit it electronically or file it by mail, phone or fax. The IRS will generate a confirmation letter with the corporation's assigned EIN immediately, if you used the online system, or will send the letter through the mail otherwise.

Step 3

Open a corporate bank account. Take the state-stamped copy of the articles of incorporation, the copy of the EIN assignment letter and proof of authorization and identity to a bank. Follow the bank's instructions for opening a business account.

Step 4

Transfer the personal loan proceeds to the corporate bank account. Withdraw money from your personal line of credit and deposit it into the business bank account. You can make one withdrawal or a series of withdrawals as needed. As long as you record from where the money is coming, it does not matter how you transfer your money to the corporation.

Step 5

Record the transaction properly in the corporate records. If you want to treat the infusion of your personal money into the business as an equity contribution to capitalize your ownership interest, or in other words, to purchase your stock in the corporation, record the transaction on the books as an increase to your owner's equity account. In this case, the corporation will not pay the money back to you; you will be responsible for paying back the personal line of credit. If you want to loan the money to the corporation for start-up activities, draft a resolution authorizing the corporation to accept loans from shareholders and have a majority of the board of directors pass it at a board meeting. Establish the terms of the loan and execute a written loan agreement between you and the corporation. Record the transaction on the books as an obligation of the corporation, as if you were a creditor.

Step 6

File IRS Form 2553 to make an S corporation election. Download the form from the IRS website. The form requires basic information and the names, addresses and Social Security numbers of all shareholders. The form requires all shareholders to consent to the S corporation election by signing the form. Make sure the corporation complies with the S corporation election requirements before submitting the form. The requirements change periodically but are outlined with specificity in the instructions to the form. Mail the form to the IRS processing center that is located in your area of the country. The IRS will mail you a letter to approve the election. The corporation is not an S corporation until you receive written approval from the IRS.

Step 7

File an S corporation election form with the state department of finance or similar state tax entity. This process will differ, depending on the state. Contact the state agency where you file your business tax returns. Ask for a form to make an S corporation election. Sometimes, this tax agency will have the form available for download on its website. Fill out the form and submit it to the state tax authority along with a copy of the IRS approval letter. (Ref. 3)