S Corp Application: Everything You Need to Know
An S corp application is an IRS form used to request S corp status. It is filed after a corporation is formed and allows a corporation to function as a small business, retaining limited liability but avoiding the double taxation that C corporations are subject to.3 min read
2. What Are the Qualifications?
3. When Should You File the Form?
4. Why Should You Choose Status as an S Corporation?
5. Obtaining a Federal Tax ID
An S corp application is an IRS form used to request S corp status. It is filed after a corporation is formed and allows a corporation to function as a small business, retaining limited liability but avoiding the double taxation that C corporations are subject to.
An S corporation is a business that has filed articles of incorporation in its state. This status allows the company to pass all income, deductions, losses, etc., to shareholders rather than paying tax itself at the corporate level. Its shareholders report the income on their personal tax forms instead.
How to File for S Corporation Status
The S corp application is IRS Form 2553. It is titled “Election by a Small Business Corporation” and gives detailed information about your business to the IRS, including its eligibility. The steps are as follows:
- Make sure your business is eligible to elect S corporation status. All shareholders must approve the decision.
- Get all your shareholders to sign the form.
- Submit the form. The address depends upon your business' principal location.
- You will be notified by the IRS service center whether it has accepted your application.
- Your status as an S corporation will be valid until you choose to terminate it or the IRS revokes it.
If you are filing for S corporation status in New York, New Jersey, or Arkansas, you are required to file an application for election with the state after your status is approved by the IRS.
What Are the Qualifications?
There are several requirements the IRS has for eligibility as an S corporation:
- The corporation must be domestic with no investors from foreign countries.
- The corporation must have 100 or fewer shareholders.
- The fiscal year of the corporation must end on December 31.
- The corporation must not be a business type that is ineligible, which includes banks and insurance companies.
- The corporation must be owned by individuals, some trusts, and estates.
- Shareholders must be United States citizens or legal residents.
When Should You File the Form?
IRS rules require that your S corporation election form be submitted within two months and 15 days after the tax year begins. If you are starting a new business, this must be done during its first year. If it is not filed on time, you will not have status as an S corporation for that tax year. However, if you can explain a legitimate reason for not filing on time, you can request that the IRS accepts your late election.
Why Should You Choose Status as an S Corporation?
There are several reasons why an S corporation status is attractive for many businesses. For one thing, it offers liability protection just like a C corporation. It is considered a separate entity, with owners being protected from debts and lawsuits involving the corporation. There are, however, situations in which this protection is not valid, such as when an owner personally guarantees a loan or commits fraud.
Taxes are another reason to elect S corporation status. Owners can reduce the amount of self-employment taxes they pay. Owners of S corporations may be considered employees, so part of their profit distribution may be considered wages and, therefore, not subject to self-employment tax. Instead, the S corporation withholds the tax as a regular income deduction.
C corporations are subject to double taxation, and S corporation status can eliminate that. Corporations pay corporate income tax, and the owners are also taxed on their dividends or profit distributions. This is considered double taxation. Since an S corporation does not pay tax on its own behalf, the profits are only taxed once, as it passes through to the shareholders' personal tax returns.
Losses from S corporations can reduce the amount of taxes owners must pay. Since losses are passed through to the owners just like profits, it reduces the total taxable amount for the shareholders.
Owners of S corporations pay taxes at personal income tax rates, which are lower than corporate tax rates. Therefore, it lowers the amount of taxes paid by the owners.
Obtaining a Federal Tax ID
One important step for S corporations is getting an Employer Identification Number, also referred to as a Federal Tax ID number. This is a nine-digit number issued by the IRS. It is necessary even though the company does not pay its own taxes.
If you need more information or help with an S corporation K-1, 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