Electing S corporation (S corp) status is a tax-related decision that certain eligible businesses can make in the United States. S corp status provides several tax advantages, but it also comes with specific requirements and restrictions. Here’s an overview of the process and considerations for electing S status:
- Eligibility Requirements:
To qualify for S corporation status, your business must meet the following criteria:
Be a domestic corporation (organized in the United States).
Have only allowable shareholders, which generally include individuals, certain trusts, and estates. Other corporations, partnerships, or non-resident alien shareholders are generally not allowed.
Have no more than 100 shareholders.
Have only one class of stock.
Not be an ineligible corporation (certain financial institutions, insurance companies, and some other entities are ineligible).
- Initial Corporation Formation:
If your business is not already organized as a corporation, you’ll need to incorporate it under state law by filing the necessary documents with the state’s secretary of state.
- Obtain an Employer Identification Number (EIN):
Your business should have an EIN, also known as a federal tax identification number, which is required for tax purposes.
- Hold an Initial Shareholders’ Meeting:
If you haven’t already done so, you should hold an initial shareholders’ meeting to adopt corporate bylaws, appoint officers, and issue stock certificates.
- File Form 2553:
To elect S corporation status, you must file Form 2553, “Election by a Small Business Corporation,” with the Internal Revenue Service (IRS). You can generally do this within two months and 15 days after the beginning of the tax year for which the election is to take effect, or at any time during the preceding tax year.
All eligible shareholders must sign the election form.
- Maintain Compliance:
Once you’ve elected S corporation status, you must meet ongoing compliance requirements, including filing annual tax returns (Form 1120S) and providing K-1 statements to shareholders.
Follow state and federal rules for S corporations, including limitations on stock ownership, distribution of profits, and other regulations.
- Enjoy Tax Benefits:
S corporations are “pass-through” entities for tax purposes, meaning that business income and losses flow through to the individual shareholders’ personal tax returns. This avoids double taxation at the corporate and individual levels.
Shareholders can potentially benefit from lower self-employment taxes compared to sole proprietors or partners.
- Considerations:
While S corp status can offer tax advantages, it may not be suitable for every business. Evaluate whether the benefits outweigh the restrictions and compliance requirements.
Consult with a tax advisor or attorney to ensure that electing S status is the right choice for your business and that you meet all eligibility requirements.
