IRS S Corp Form: Everything You Need to Know
An IRS S corp form is used to take the additional step of converting a C corp to an S corp.3 min read
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.
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.
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.
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.
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.
If you need more information or help with the IRS S corp form, 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, Stripe, and Twilio.