Electing S Corp Status

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S corporation (S corp) status is a tax designation elected by limited liability companies (LLC) and C corporations — most often for its potential tax advantages. A common misconception is that you can “form” an S corp in the same way you form an LLC. In fact, only pre-existing LLCs or C corps may elect S corp status. Making this election won’t, however, dissolve your LLC or C corp.

This guide will discuss the steps needed to elect S corp status, the required form, and the reasons you may want to elect an S corp tax designation.

What Is an S Corp?

An S corp is a tax designation that LLCs or C corps may elect. In order to do so, a business must first meet these requirements:

  • It’s a domestic corporation or LLC.
  • It has no more than 100 shareholders (if a corporation). All Shareholders must be US citizens or legal US residents and private individuals (not business entities).

With an S corp tax designation, the Internal Revenue Service (IRS) will consider a company’s members and owners as employees. As a result, the S corp must pay them a reasonable salary. These owner-employees also may take distributions from the company.

  • Reasonable Salary: This is the money you pay yourself through your S corp. Because the IRS considers this a wage, it’s subject to both employment tax and income tax.
  • Distributions: These payments are the profits and losses that pass through an S corp to its members/owners. They’re only subject to income tax — not employment taxes. 

Why Elect S Corp Status?

Companies often elect S corp status for its advantageous pass-through taxation structure. One of the main benefits of S corp status is the ability to take distributions — profits and losses passed through an S corp to the members/owners subject only to income tax. 

In addition to their potential tax benefits, S corps can issue stock. This can help early-stage companies compensate their employees using equity.

S Corporation Election Form 2553

When you’re ready to designate an S corp status for your business, you’ll need to file Form 2553 with the IRS. As you prepare to do so, keep these three factors in mind:

  • For S corp status to take effect for the current year, you must file Form 2553 no more than two months and 15 days after the start of the tax year. Because a small business year starts on January 1, two months and 15 days after that is March 15.
  • Even if you miss the deadline, you can file Form 2553 at any time in anticipation of the next tax year. For instance, you can file anytime during 2022 if you wish to elect S corp status for 2023. If the IRS approves your application, your business will become an S corp the following tax year.
  • In the event of late filing, if your LLC or C corp has a reasonable explanation and proof of intent to file, you may be able to elect S corp status for the same tax year. 

How to File Form 2553

If you believe electing S corp status is right for your company, you’ll need to follow these five steps:

  1. Request an S corp application through the IRS Business and Specialty Tax line or download a PDF version.
  2. Complete the form by entering your Employer Identification Number (EIN), your corporation’s name, its business address, its date and state of incorporation, and your name and role within the company. You’ll also need to provide details on your selected tax year as well as each of your shareholders.
  3. Have all shareholders sign your completed Form 2553.
  4. Submit your completed form to the IRS via fax or mail. Check out the IRS’ website for more information.
  5. Await a reply from the IRS. The IRS will make its decision to allow your S corp election within 60 to 90 days, depending on the filing.

Maintaining Your S Corp Status

Once your S corp status takes effect, you must ensure you continue to operate under the S corp requirements set out by the IRS. Working with an accountant or tax agent can help you not only meet these standards but also fully benefit from all the advantages of the S corp tax designation.

Want some additional help? Consider hiring an accountant to assist you with your finances.