1. S Corp Eligibility Requirements
2. Timing of S Corp Election
3. Tax Treatment of C and S Corporations

2553 S corp refers to IRS Form 2553, which is filed by a C corporation to elect tax treatment as an S corporation. Corporations that do not make this election are subject to income tax at both the corporate and individual levels. It's important to correctly classify your business with the IRS to avoid a substantial tax burden.

C corporations and limited liability companies (LLCs) may elect tax treatment as S corporations to take advantage of pass-through taxation. With this type of entity, profits and losses are not taxed at the corporate level, only at the individual level of each shareholder when distributed based on ownership percentage. C corporations must file taxes quarterly, but S corps can file on an annual basis.

C corps and LLCs can opt for S corp election by filing IRS Form 2553, Election by a Small Business Corporation. The IRS will confirm this election in writing if you are eligible, usually within 60 days of filing the form. After this confirmation is received, S corp status immediately takes effect. Form 2553 requires the approval signatures of every shareholder or LLC member. This fee can be filed by either mail or fax and does not include a filing fee.

Businesses that are not yet incorporated must first file state-required documents, such as by-laws or articles of incorporation. You should establish your C corp or LLC in the state where you conduct most of your business. After incorporation is complete, then file Form 2553.

S Corp Eligibility Requirements

To be eligible for S corp taxation, a C corp or LLC must have the following characteristics:

  • Issues only one class of stock, although different voting rights are allowed.
  • Have only U.S. citizens or residents as shareholders; companies with non-resident alien shareholders are not eligible.
  • May not have corporations or businesses as shareholders with the exception of certain trusts and estates.
  • Must have 100 or fewer shareholders, although spouses and immediate families can be treated as single shareholders.

In some states, federal S corp election is automatically honored. In other states, you must file a separate S corp election at the state level. A few states don't recognize this tax status, which means you'll be charged corporate income tax if you incorporate or do businesses in those states.

Timing of S Corp Election

To elect S corp status, you must file Form 2553 by the 15th day of the third month of the tax year in question. The election will take place from your incorporation date if you file within 75 days of that date. In some cases, corporations may be able to follow special IRS rules to make a late election.

To make a late election, a corporation must meet S corp eligibility criteria and have reasonable cause for missing the filing deadline. At this time, reasonable cause is not strictly defined by the IRS, so it makes sense to attempt to file late if you simply missed the deadline. When making a late filing of Form 2553, you must state that each shareholder has reported his or her income in a way that is not consistent with the intention to elect S corp status.

Late 2553 forms should be marked with FILED PURSUANT TO REV. PROC. 2013-30 and be appended with a detailed explanation of the circumstances that led to the late filing. You should address what happened to cause the late filing and when it occurred, how this occurrence resulted in a late filing, and how your financial matters were handled during this time. Both this explanation and the form itself must be signed by all shareholders.

Tax Treatment of C and S Corporations

When an S corporation is formed, the taxable income of the corporation passes through to shareholders' individual tax returns. Corporations that do not elect S corp taxation treatment will be taxed on profits at the corporate rate of up to 35 percent, with no deduction for shareholder dividends paid. When shareholders receive dividends, these funds are taxed at each owner's individual tax rate, depending on his or her tax bracket. In most cases, the corporation pays a lower tax burden by making the S election.

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