Electing S corp status is a filing, not a new company. It changes how your existing corporation or LLC is taxed. Here is how it works from start to finish.
Step 1: Check that you qualify
To be an S corp, a business generally must:
- Be a domestic corporation or an LLC that elects to be taxed as a corporation.
- Have no more than 100 shareholders.
- Have only allowable shareholders: individuals, certain trusts and estates, but not partnerships, corporations or nonresident aliens.
- Have only one class of stock, so profits and distributions follow ownership percentages.
Step 2: File Form 2553 on time
To take effect for a tax year, Form 2553 must be filed no more than 2 months and 15 days after the start of that year, or at any time during the year before. For a calendar-year business, that means by March 15. Every shareholder signs a consent. An LLC can file Form 2553 directly; it is treated as also electing to be taxed as a corporation.
The IRS confirms an accepted election with a notice, usually a CP261. Keep it with your business records.
Missed the deadline?
It is often fixable. The IRS provides simplified late-election relief, generally within 3 years and 75 days of the intended effective date, when you have reasonable cause and have filed consistently with S corp status. The request goes in with the late Form 2553.
Step 3: Check your state
Most states follow the federal election, but some require their own form, and some tax S corps directly. California, for example, charges 1.5% of net income with an $800 minimum.
Step 4: Run the business as an S corp
- Payroll: owners who work in the business must be paid a reasonable salary through payroll, with withholding.
- Distributions: profit above salary is paid as distributions, in proportion to ownership.
- Returns: Form 1120-S is due March 15, with a K-1 for each owner that flows into their personal return.
- Health insurance: for owners with more than 2%, premiums are handled through payroll and then deducted on the personal return.
Not sure an election is worth it? Run the S corp tax calculator or read S corp vs LLC.