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S corporation election help

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An S corporation is a tax election

You cannot form an S corporation with a state. You form an LLC or a corporation, and then, if it qualifies, it asks the IRS to be taxed under Subchapter S by filing Form 2553. Firmlane helps eligible companies prepare and file Form 2553. This page explains who qualifies, when to file and what changes, so you can decide with your tax professional whether the election fits.

  • Help preparing and filing IRS Form 2553
  • For eligible US LLCs and corporations
  • Every shareholder signs a consent to the election
  • Nonresident aliens cannot be S corporation shareholders
Start your company Check eligibility

How Firmlane helps with the S election

Firmlane helps eligible LLCs and corporations make the S election:

  • We go through the eligibility tests on this page with you before anything is prepared.
  • We prepare Form 2553 from your company's details, including its EIN, tax year, requested effective date and each shareholder's ownership.
  • We collect the consent signature that every shareholder must give.
  • We file the form with the IRS by mail or fax, using the service center the Form 2553 instructions list for your state, and keep the IRS response in your account.

No company yet? Form an LLC or a C corporation first, and get the EIN the election form asks for. When you choose S corporation in our formation wizard, it routes you to one of those entity types and shows the key Form 2553 rules before you continue.

Whether the election is right for you is a tax question. Firmlane does not give tax advice, so we recommend deciding it with a qualified tax professional.

Entity vs election

Two separate layers: state law and federal tax

The state layer decides what your company legally is. You file articles of organization to create an LLC, or a certificate or articles of incorporation to create a corporation. That gives you liability protection and a legal identity.

The federal tax layer decides how the IRS taxes that company. A corporation is taxed as a C corporation by default. An LLC is taxed as a disregarded entity or a partnership by default. Either one, if it meets the requirements, can file Form 2553 to be taxed as an S corporation instead.

The election changes the tax treatment, not the legal entity. An LLC that elects S status is still an LLC under state law, with the same operating agreement and the same name.

  • S status is granted by the IRS, not by a state
  • An eligible LLC electing S status does not also need Form 8832, per the IRS instructions
  • The election can be revoked or terminated, for example if the company stops qualifying

Eligibility

Every one of these must be true

The IRS lists these tests for a corporation or eligible entity to elect S corporation status. Failing any one of them means the election is not available, or ends if it was already in place.

Requirements

  • It is a domestic corporation, or a domestic entity (such as an LLC) eligible to be taxed as a corporation
  • It has no more than 100 shareholders. A married couple and their estates count as one, and certain family members can be treated as one
  • It has only one class of stock. Differences in voting rights alone are allowed
  • It is not an ineligible corporation, such as certain banks and thrifts, insurance companies or domestic international sales corporations (DISCs)
  • Every shareholder signs a consent to the election

Who cannot be a shareholder

  • Nonresident aliens
  • Partnerships
  • Corporations
  • Trusts, other than the specific types the tax code allows

Who can be a shareholder

  • US citizens and US resident individuals
  • Estates
  • Certain trusts
  • Certain tax-exempt organizations

Non-US founders: this election is not available to you as an owner

If any owner is a nonresident alien, the company cannot be an S corporation, and an existing S election terminates if a nonresident alien becomes a shareholder. Many international founders use an LLC or a C corporation instead. Our international founders guide compares the options.

Timing

When Form 2553 is due

Per the IRS Instructions for Form 2553. Missing the window usually pushes the election to the following tax year.

  • Standard deadline

    No more than 2 months and 15 days after the beginning of the tax year the election is to take effect.

  • Early option

    Any time during the tax year before the year the election is to take effect.

  • Calendar-year example

    For a tax year starting January 1, the 2-month period ends on February 28 (29 in leap years), so the deadline is March 15.

  • Brand-new company

    The first tax year generally starts when the company first has shareholders, acquires assets or begins doing business, whichever comes first.

  • If you file late

    The election generally takes effect for the following tax year.

    The IRS offers late election relief under Rev. Proc. 2013-30 in some cases, generally within 3 years and 75 days of the intended effective date, if there was reasonable cause.

  • IRS response

    The IRS says a corporation should generally receive a determination within 60 days of filing.

    That is an IRS estimate, not a guarantee.

  • How to file

    By mail or fax to the IRS service center listed for your state in the Form 2553 instructions.

Tax mechanics

What changes after the election

Income passes through to the owners

An S corporation generally does not pay federal income tax on its profits. Income, losses, deductions and credits pass through to the shareholders, who report them on their personal returns and pay tax at individual rates. That is how S status avoids the corporate-level layer of a C corporation's double taxation. Some entity-level taxes can still apply, for example on certain built-in gains and passive investment income.

The company files an annual information return on Form 1120-S, and each shareholder receives a Schedule K-1 showing their share.

Reasonable compensation

If you work in the business as an officer, the IRS expects the S corporation to pay you reasonable compensation as wages before it makes non-wage distributions to you. The IRS can reclassify distributions as wages subject to employment taxes when pay is too low. Factors the IRS lists include your training and experience, duties, time devoted to the business, what comparable businesses pay for similar services, and payments to non-shareholder employees.

In practice this means running payroll, filing employment tax returns and keeping records that support the salary you chose.

Allocations follow ownership

Because an S corporation can have only one class of stock, profits and losses are allocated in proportion to ownership. Special allocations that a partnership-taxed LLC might use are not available.

States do their own thing

State treatment of S corporations varies. Some states follow the federal election, some require a separate state filing, and some tax S corporations at the entity level. Check your state's rules with your tax professional.

Compare

Three ways the same business can be taxed

  • Who pays federal income tax on profits

    LLC, default tax
    The owners, on their own returns.
    LLC or corp with S election
    The owners, on their own returns.
    C corporation
    The corporation at 21%, then shareholders on dividends.

  • Federal return

    LLC, default tax
    Owner's return (one member) or Form 1065 (two or more).
    LLC or corp with S election
    Form 1120-S, with K-1s to shareholders.
    C corporation
    Form 1120.

  • Owners who work in the business

    LLC, default tax
    Generally not employees of a partnership-taxed LLC.
    LLC or corp with S election
    Must receive reasonable wages through payroll.
    C corporation
    Officers who work in the business are paid as employees.

  • Nonresident alien owners

    LLC, default tax
    Allowed.
    LLC or corp with S election
    Not allowed.
    C corporation
    Allowed.

  • Owner limits

    LLC, default tax
    No federal limit on the number of members.
    LLC or corp with S election
    Up to 100 shareholders, allowable types only.
    C corporation
    No federal limit.

  • Classes of ownership

    LLC, default tax
    Flexible, set in the operating agreement.
    LLC or corp with S election
    One class of stock only.
    C corporation
    Multiple classes allowed.

Simplified comparison of federal rules. Self-employment tax, state taxes and your personal situation can change the picture.

A sensible route

If you think the S election fits

  1. 01

    Confirm every owner qualifies

    Check that every owner is an allowable shareholder and that no owner is a nonresident alien. If anyone is, stop here: consider an LLC or a C corporation.

    Before you form

  2. 02

    Form an LLC or a corporation

    Use Firmlane to form the entity in your chosen state. For an LLC, decide how the operating agreement handles distributions, since S status requires them to follow ownership.

  3. 03

    Get an EIN

    Form 2553 asks for the company's EIN. Firmlane offers EIN assistance on eligible orders; the IRS issues the number.

  4. 04

    Decide with a tax professional

    Model the numbers, including reasonable compensation, payroll costs and state treatment, before you elect.

  5. 05

    File Form 2553 on time

    Every shareholder signs, and Firmlane helps you prepare and file the form. File within 2 months and 15 days of the start of the tax year the election is for, or during the prior tax year.

    Deadline-driven

  6. 06

    Keep up with annual filings

    File Form 1120-S, run payroll for working owners, and keep your state annual reports current.

Where to go next

General information, not tax advice

This page summarizes IRS rules for general information only. It is not tax or legal advice, and it does not tell you whether an S election is right for you. Firmlane helps eligible companies prepare and file Form 2553, but it is not a law firm or accounting firm, does not give tax advice and is not affiliated with the IRS or any government agency. The IRS decides whether an election is accepted. Consult a qualified tax professional before making or revoking any election.

Official sources

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Start with the right entity

Form the LLC or C corporation first. Our wizard shows the S corporation rules along the way, and Firmlane helps you file Form 2553 once you and your tax professional decide the election fits.

Start your company Ask about Form 2553 help

$0 Firmlane service fee on eligible formations. You pay the state filing fee, shown before you pay.