What Is an S Corp?
An S corporation is a tax designation that uses a hybrid form of the pass-through tax structure that allows the income and losses of a corporation or a limited liability company (LLC) to pass through directly to its shareholders. This means LLCs and corporations that elect S corp status don't have to pay corporate income taxes.
S corp owners, on the other hand, have their income from the firm distributed to them in the form of a reasonable salary and/or distributions. They must then report that income on their individual tax returns.
Why Form an S Corp?
S corporations may provide business owners with tax advantages because S corps aren’t taxed at the corporate level, and their distributions aren’t subjected to self-employment taxes. However, S corps have more complex legal and tax reporting requirements along with higher accounting, legal, and payroll costs.
To determine if electing S corp status makes sense for your business, you’ll need to weigh the benefits against the costs of establishing and maintaining an S corp. It’s usually advantageous for sole entrepreneurs to elect the S corp tax designation when they anticipate their annual profits will reach $60,000 to $100,000. In these cases, the tax savings typically outweigh the additional costs of forming and maintaining an S corporation.
Recommended: Check out our S Corp vs. C Corp vs. LLC article to learn whether or not an S corp is right for you.
What Is Form 2553?
Form 2553 is the form formal business entities like corporations and LLCs use to elect the S corporation tax designation with the IRS. In order to start an S corporation, you must first form an LLC or corporation and then elect S corp status with the IRS by filing Form 2553, Election by a Small Business Corporation.
How Do I File Form 2553?
Filing Form 2553 is fairly straightforward. Simply follow these instructions:
- Enter your business's basic information in the first part of Form 2553.
- Choose your company’s tax year in Item F. The “Calendar year” option refers to January 1 to December 31.
- Skip Item G if you have fewer than 100 shareholders.
- Section I is an explanation for anyone filing Form 2553 after the deadline. For information on relief for late filers, review the "General Instructions" section of the IRS instructions for Form 2553.
- In the final section, you must include the names and addresses of all shareholders (or members of the business if you own an LLC) along with their signatures consenting to the election of S corp status. You may print out additional copies of this page if you need more space for signatures.
- Only complete Part II if you selected Box 2 or 4 in Item F of Part I.
- Because Part II can prove challenging to complete, we suggest reviewing the "Specific Instructions" section of the IRS instructions for Form 2553. You also may want to consult with an accountant if you have additional questions or concerns.
- Only complete Part III if your business is a qualified subchapter S trust. Most small business owners can skip this section because it only applies to companies with trusts as their shareholders.
- You can skip Part IV if you fill out the form before the deadline.
When Should I File Form 2553?
In order to elect S corp status, a company must file Form 2553 at the appropriate time. According to the IRS, an S corp may file Form 2553:
- At any time during the tax year preceding the tax year in which it will take effect.
- Within two months and 15 days of the first day of the tax year in which the election will take effect.
For companies that use a calendar tax year, two months and 15 days from the first day of the tax year is March 15. For newly formed LLCs or corporations, the day their home state recognizes their Articles of Organization or Articles of Incorporation serves as the first day of the tax year for that year.
In some cases, a company may file a relief for late election with the IRS. For more information on this, see the IRS’ Instructions for Form 2553.
Once your S corp is up and running, be sure to read our guide on how to file S corp taxes.