1. Who Qualifies to File as an S Corporation?
2. Requirements for S Corporation Treatment
3. How to Apply for S Corporation Treatment
4. Revocation of S Corporation Treatment

If wondering how to form an S corporation, business owners have to form a corporation and then file the Election by a Small Business Corporation,  or Form 2553 with the IRS. The S corporation tax treatment is available to some small corporations and LLCs that meet the requirements.

Who Qualifies to File as an S Corporation?

The S corporation tax treatment was designed to benefit small corporations by preventing them from being suffocated by federal taxes. This classification is also available to LLCs that meet the requirements, and it enables the business to gain pass-through status. Businesses with pass-through status do not pay corporate tax to the IRS. The tax wipes away a considerable amount of the profits of many corporations each year. The income of an S corporation passes through to the individual shareholders.

Therefore, the formation of an S corporation starts with incorporating the normal way in your home state. The procedure of incorporation varies from state to state, but it usually follows the following steps:

  • Name Reservation
    The name of the corporation is reserved at the office of the secretary of state. States have guidelines for acceptable company names. These normally include a requirement for the name to be distinguishable from other entity names.
  • Appointing the Corporation's Directors 
    The directors are tasked with overseeing the management of a corporation.
  • Appointing a Registered Agent for Service Process
    The agent is responsible for receiving and sending legal papers on behalf of the corporation.
  • Filing the Articles of Incorporation 
    This document officially informs the secretary of state about the business owner's desire to register the business. The document is called a Certificate of Incorporation in some states.
  • Creating Bylaws
    The directors of the new corporation meet to adopt bylaws, initiate the issuance of stock, and appoint the corporation's officers.
  • Issuing Stock
    The corporation can now issue stock to shareholders. It is important for businesses that desire S corporation treatment not to issue stock to more than 100 shareholders.
    Registering with Regulatory and Tax Authorities
    The new corporation needs to obtain an EIN from the IRS and to get permits and licenses from the relevant authorities.

The IRS treats all newly formed corporations as C corporations. The business can subsequently ask to be treated as an S corporation.

Requirements for S Corporation Treatment

The IRS has a number of requirements for a business to be granted S corporation treatment:

  • The corporation should not have more than 100 shareholders.
  • It should only have U.S. citizen or U.S. resident shareholders.
  • It should not be a bank, Insurance company, Domestic International Sales Corporation (DISC), or former DISC.
  • All its shareholders must be individuals and not corporations, business trusts, LLCs, Individual Retirement Accounts, or partnerships.
  • The corporation should have only one class of stock.
  • The corporation's decision to file as an S corporation should be supported by all the corporation's owners.

How to Apply for S Corporation Treatment

A corporation that meets all the requirements can at any time in its existence apply for S corporation treatment to the IRS by filing Form 2553, Election by a Small Business Corporation. The signatures of all the shareholders are required on this form.

Along with the signatures, you will also need to mention the following details on the form:

  • The company's name
  • The Employer Identification Number
  • The company's address.
  • The effective date of S corporation election
  • Tax year information
  • Details of the shareholders or members.

The ideal time to file for S corporation treatment is during the first two months and 15 days of the corporation's tax year. Otherwise, the S corporation treatment, if granted, will be effective starting with the following tax year. The IRS will inform you of its decision within 60 days.

Revocation of S Corporation Treatment

After being granted S corporation treatment, your business' status will remain as such until either you choose to revoke it or the IRS terminates it. The IRS can terminate S corporation treatment for businesses that have broken any of the requirements for S corporation treatment. If S corporation treatment is either revoked by the corporation or terminated by the IRS, your business can not qualify for S corporation treatment again for the next five years.

If you need help with filing for S corporation treatment, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.