Why Convert to an S Corp?
There are many reasons to convert to S corp status, but the potential tax savings typically rank at the top. S corps benefit from pass-through taxation in which the company’s profits and losses pass through to its members/owners. This means S corps don’t face taxation at the corporate level.
S corp members/owners take the business’s profits and losses through a system of distributions, which are subject to income tax at the state and federal levels. But, unlike a salary, distributions aren’t subject to employment taxes. LLCs default to a “pass-through entity” tax status, meaning their members pay taxes on their share of the company's profits on their personal tax returns. Distributions can enable you to save money on your taxes at the end of the year.
Have more questions about S corp status? Check out our What Is an S Corporation? guide.
How to Elect an S Corp Tax Designation
If you believe electing S corp status is right for your company, you must take some key steps in order to make this conversion. First, you must ensure you meet the requirements for S corp status.
To qualify for S corp status, your business must:
- Operate as a domestic corporation or LLC
- Have no more than 100 shareholders (if a corporation) who’re
- US citizens or legal residents of the United States and
- private individuals (not other business entities)
- Only issue one class of stock
Once you verify your eligibility for S corp status, you must complete and file Form 2553 with the IRS. You can request an S corp application through the IRS Business and Specialty Tax line or download a PDF version.
How to File Form 2553
You may need to complete one or more of Form 2553’s four parts, depending on your specific situation.
The first part of Form 2553 involves stating the following information:
- Your business’s name
- Your business’s address
- Your business’s incorporation date
- Contact information for your legal representative
- Your election date (This is the date on which you’d like your S corp status to take effect.)
- Any reasonable exceptions for filing late, if applicable, along with proof of the actions you took when you missed the filing date
- Your selected type of tax year (The most common choice is “calendar year.” If you select box 2 or 4, you’ll need to fill out Part II of this form.)
Finally, you’ll need to provide the names, addresses, and signatures of all of your shareholders as evidence of their consent to elect S corp status.
You’ll only need to complete this part of Form 2553 if you select box 2 or 4 for your S corp’s tax year. If you do need to fill out Part II, carefully review the “Specific Instructions” section of the IRS’ instructions for Form 2553. Given the complexity of Part II, we recommend you consult with an accountant if you have additional questions or concerns.
Parts III and IV
You’ll only need to complete Part III if you want to make a qualified subchapter S trust (QSST) election, and Part IV is only needed if you missed the deadline and are filing late. If either of these applies to your business, refer to the “Specific Instructions” section of Form 2553 or consult a qualified accountant.
When to File Form 2553
You must file Form 2553 no later than two months and 15 days after the start of the tax year in which you want your company’s S corp status to take effect. However, you can file Form 2553 any time during the year to elect S corp status for the following tax year. You don’t have to follow a calendar year to qualify for S corp status, but you may need to fill out Part II on Form 2553 if you choose an alternative tax year type.
Where to Send Form 2553
Where you’ll send your completed Form 2553 will depend on your business’s location.
|Connecticut, Delaware, Georgia, Illinois, Indiana, Kentucky, Maine, Maryland, Massachusetts, Michigan, New Hampshire, New Jersey, New York, North Carolina, Ohio, Pennsylvania, Rhode Island, South Carolina, Tennessee, Vermont, Virginia, Washington D.C., West Virginia, Wisconsin||
Department of the Treasury
|Alabama, Alaska, Arizona, Arkansas, California, Colorado, Florida, Hawaii, Idaho, Iowa, Kansas, Louisiana, Minnesota, Mississippi, Missouri, Montana, Nebraska, Nevada, New Mexico, North Dakota, Oklahoma, Oregon, South Dakota, Texas, Utah, Washington, Wyoming||
Department of the Treasury
Keep Your S Corp Compliant
Once you successfully elect the S corp tax designation for your business, you’ll want to ensure you keep your S corp compliant. Check out our How to File S Corp Taxes guide to learn more about filing your annual tax paperwork. We also recommend you consult with an accountant to help keep your company on track throughout the year.