S Corp Election

An S corp election is when a corporation elects to be taxed a certain way by the IRS. An S Corp (also known as a sub-chapter S corporation or an S corporation) is an organization that classifies itself as having a small business status. Such a status offers corporations the opportunity to enjoy the benefits of having the limited liability of a corporation, paired with the tax rate of individual shareholders.

Facts About Sub Chapter S Corporation

Many LLCs and C corporations choose to apply for S corporation status because it provides several advantages (including numerous tax planning benefits) for their business.

The application process varies slightly depending on the specifics of the company in question (whether it is an LLC or a C Corporation); however, in all cases, the corporation must first choose a state for incorporation, file articles of incorporation, and then appoint a registered agent in that state.

Some points about S corporation status that you should be aware of are as follows:

  • A company with S corporation status exists first as a regular corporation before obtaining this status.

  • An S corporation is not a separate entity for taxes.

  • Tax deductions, losses, and incomes within an S corporation are passed on to the company's shareholders.

  • Operating a business under this status allows owners to receive income from the organization as both compensation and dividends. S corporation status enables a reduction in the company owner's overall tax liability.

  • According to Corporate Direct, many businesses in the service sector should file for S corporation status to avoid being characterized as a personal service corporation by the IRS.

Facts Specific to C Corporations

  • C corporations that the IRS classify as providing a service to the general public (for example, consulting) are referred to as PSCs.

  • C corporations receive a low initial rate from the IRS, typically in the region of 15 percent.

  • The tax rate for PSC earnings is 35 percent which in most cases is notably higher than the company would pay if classified as an S corporation.

  • There can be pros and cons to operating as an S corporation, and operating as a C corporation and the best route for your company will depend on the specifics of your situation. It is advised to work with your legal advisor, tax advisor, or CPA in order to determine the best option for you.

Form 2553 to Elect S Corporation Status

The form required to file the election for S corporation status is the IRS Form 2553. This form provides the IRS with detailed, relevant information about the company that is applying for S corporation status. The completed form will then allow the IRS to assess the organization's eligibility for S corp status. To be considered for S corp status, the election deadline states that this form must be submitted to the IRS within 75 days of the turn of a new year, or within 75 days of the LLC or C corporation's anniversary of formation.

What Should be Included on Form 2553:

The following information should be provided to the IRS via Form 2553:

  • The corporation's name and address

  • What the tax year will be when the elections take place.

  • A contact person for the IRS (A legal representative for the corporation or a corporation officer)

  • Shareholder information: the shareholder's name, address, tax year, percentage or number of shares owned, dates the shares were acquired, and Social Security number

  • Signatures of each shareholder.

An S corporation status can provide an LLC or a C corporation with thousands of dollars in potential tax savings, so companies often find that filing for Form 2553 is worthwhile. A company can expect to receive a response from the IRS within 60 days of submitting the form.

What are the Requirements to be Considered for S Corporation Status?

The IRS specifies several prerequisites to obtaining S corporation status which are as follows:

  • The corporation must have a maximum of 100 shareholders.

  • The corporation must be a domestic (American) corporation that has no foreign investors.

  • The corporation must have only one stock holding.

  • The corporation must work to a year-end method which considers Dec. 31 the end.

If you are considering applying for S corp status, or you need any further advice regarding this matter, you can post your legal need on UpCounsel's Marketplace. UpCounsel only accepts the top 5 percent of lawyers to its site and they come from schools such as Harvard Law or Yale. Our lawyers have an average of 14 years of legal experience, and this includes working with prestigious companies like Google and Airbnb.