Key Takeaways

  • To form an S corp, business owners must first create a C corporation or LLC and then elect S corporation tax status using IRS Form 2553.
  • The election must meet strict eligibility criteria, including limits on shareholders and stock classes.
  • Filing deadlines are crucial—Form 2553 must typically be filed within 2 months and 15 days after the start of the tax year.
  • S corp status offers pass-through taxation, reducing double taxation on corporate income.
  • LLCs can also elect S corp status for tax purposes using IRS Form 8832 in combination with Form 2553.
  • State-level S corp requirements may differ from federal ones, and some states require separate filings.

An IRS S corp form is used to take the additional step of converting a C corp to an S corp. All corporations begin as C corps and are treated that way by default. As a result, the business will pay income tax as a corporation for all income it receives during the year.

Why Elect as an S Corporation?

C corporations are subject to income taxes of up to 35 percent of their profits, with no deductions given for shareholder dividends. Shareholders then pay tax on their dividends or distributions. The level of taxation for this income depends on the individual shareholder's tax bracket.

S corporations provide significant advantages when it comes to taxation. For one thing, they have pass-through taxation, which means that all profits and losses are passed to shareholders, and they do not pay taxes at the corporate level. Also, while C corporations must file and pay taxes quarterly, S corporations need to do this only once a year.

S corporations, also referred to as Subchapter S corporations, have “small business” status, which means they enjoy the same limited liability that a corporation provides to its shareholders, but the Internal Revenue Service (IRS) taxes only its shareholders, usually at a much lower rate. This prevents double taxation.

Key Differences Between C Corp and S Corp Taxation

While both C corporations and S corporations offer limited liability and formal business structures, their taxation differs significantly. A C corporation is taxed twice—first on the company’s profits and again when dividends are distributed to shareholders. By contrast, an S corporation passes income, losses, deductions, and credits directly to its shareholders, who report them on their individual tax returns.

The S corp election is especially appealing for small business owners who wish to avoid double taxation and simplify their accounting structure. However, S corps are limited to 100 shareholders and can only issue one class of stock, making them less flexible for companies seeking venture capital or multiple investment rounds.

How to Create an S Corporation

Not every business qualifies to become an S corporation. In order to qualify, the corporation must comply with the following:

  • The corporation must be domestic.
  • The corporation must have shareholders who are individuals, qualified trusts, and estates.
  • Shareholders may not be partnerships, non-resident aliens, or other corporations.
  • There can be no more than 100 shareholders.
  • The corporation can issue only one class of stock.
  • The corporation must not be a type of business that is ineligible, such as insurance companies and banks.

Qualified corporations need to submit Form 2553, titled “Election by a Small Business Corporation” to the IRS. It must be signed by every shareholder, and will usually be approved within 60 days.

Some states will not accept the federal form and have their own forms that corporations must submit to elect as S corporations for state taxes.

Step-by-Step: How to Form an S Corp with the IRS

Forming an S corporation involves several key steps that ensure compliance with both federal and state regulations.

  1. Form a C Corporation or LLC:
    Start by filing Articles of Incorporation (or a Certificate of Formation, depending on your state) with your Secretary of State.
  2. Obtain an EIN (Employer Identification Number):
    The IRS requires an EIN before a company can file Form 2553. This can be completed online at the IRS website.
  3. File IRS Form 2553 – Election by a Small Business Corporation:
    This form must be signed by all shareholders and submitted within 2 months and 15 days after the beginning of the tax year when the election is to take effect.
  4. Check State-Level Requirements:
    Some states, such as California, New York, and Texas, require separate state-level S corp elections or additional filings for recognition at the state tax level.
  5. Maintain Compliance:
    After approval, S corporations must follow corporate formalities such as holding annual meetings, maintaining bylaws, and recording minutes.

Pro Tip: The IRS typically responds to Form 2553 filings within 60 days. If the form is rejected, the IRS will provide a written explanation and instructions for correction.

S Corporation Form Deadlines

It is important that a corporation files its Form 2553 at the right time. It is due within three months and 15 days after the beginning of the company's tax year. If it is not filed by that deadline, your company must pay taxes as a C corporation for that fiscal year. You can still fill it out and submit it at any time during the year, and your corporation will qualify as an S corporation for the following year.

If you miss the deadline, it is possible to apply for late submission and have the form accepted for the current year. The IRS will accept this only if the corporation was eligible to elect as an S corporation and intended to do so at the time that the form was supposed to be filed. If it was not eligible by that date, the IRS will not accept late election. However, the IRS considers accidental failure to file the form as a reasonable cause. All circumstances must be explained in detail.

Late S Corporation Election and Reasonable Cause Relief

If your company misses the 2-month-and-15-day deadline, you may still qualify for late election relief under IRS rules. To apply, you must demonstrate that the failure to file on time was due to reasonable cause—for instance, lack of awareness about the filing requirement or delays caused by third-party service providers.

To request this relief:

  • Include a written statement explaining the delay and affirming the company’s eligibility as an S corp during the intended tax year.
  • Ensure that all shareholders report income consistent with S corp treatment for that year.
  • Submit both Form 2553 and the reasonable cause explanation to the IRS Service Center where you file your tax return.

If approved, the IRS may retroactively apply S corporation status to the beginning of that tax year.

Benefits of S Corporation Status

There are several benefits of electing S corporation status:

  • S corporations have the same liability protection as C corporations.
  • S corporations can reduce the amount of self-employment taxes their shareholders pay because the amount that is paid to owners as employees is reduced and paid out as dividends instead.
  • Because S corporations are not taxed at the corporate level, and all profits pass through to shareholders, it avoids double taxation.
  • The losses that are passed through to shareholders can offset any income they receive and result in a lower tax obligation.

Potential Drawbacks of Electing S Corporation Status

While S corporation status offers substantial tax advantages, it is not ideal for every business. Consider these limitations:

  • Ownership restrictions: Only U.S. citizens or residents may hold shares, and ownership cannot exceed 100 individuals.
  • Limited stock flexibility: The “one class of stock” rule restricts varying profit distributions or preferred shareholder rights.
  • Increased IRS scrutiny: Shareholders who are also employees must receive “reasonable compensation,” and underpayment can trigger audits.
  • State-level taxes: Some states, like California, impose a franchise tax or minimum annual fee on S corporations even though the federal government does not.
  • Administrative obligations: S corps must maintain corporate records, file annual reports, and issue shareholder K-1 statements.

Understanding these potential drawbacks helps business owners determine whether forming an S corp aligns with their goals and structure.

LLCs Electing as S Corporations

C corporations aren't the only business type that can elect as S corporations for the benefits they provide. LLCs can do so, too, by filing IRS Form 8832.

LLCs are normally considered disregarded entities, which means they are taxed in the same way as a sole proprietorship or partnership. Although the LLC status offers limited liability protection like an S corporation, the S corporation status gives owners the opportunity to reduce their self-employment taxes.

How LLCs File to Be Taxed as an S Corporation

LLCs can elect to be treated as S corporations for tax purposes to minimize self-employment taxes. This requires completing both:

  • Form 8832 (Entity Classification Election) — to elect corporate tax treatment; and
  • Form 2553 (Election by a Small Business Corporation) — to apply for S corporation status.

After approval, members can receive a reasonable salary and the remainder of income as distributions, which are not subject to self-employment tax. This setup can lead to meaningful savings for profitable LLCs that meet the S corp eligibility criteria.

However, LLCs must continue to comply with corporate formalities, maintain separate financial records, and issue W-2s for employee-shareholders to remain in good standing with the IRS.

Frequently Asked Questions

  1. What IRS form do I use to elect S corporation status?
    Use IRS Form 2553, titled Election by a Small Business Corporation, to elect S corporation tax treatment.
  2. When should I file Form 2553?
    It must be filed within 2 months and 15 days after the beginning of your tax year. Late elections may be accepted if you provide reasonable cause.
  3. Can an LLC file to become an S corp?
    Yes. An LLC can elect S corp tax status by filing Form 8832 first, then submitting Form 2553.
  4. What are the main benefits of forming an S corp?
    Avoiding double taxation, reducing self-employment tax, and gaining liability protection are key advantages.
  5. What happens if I miss the S corp filing deadline?
    You can apply for late election relief with an explanation of reasonable cause. If approved, your S corp status may be retroactive.

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