What is an S-Corporation Election?
An S-Corp Election is a tax-related filing. Many people think that an S-Corporation is a type of corporation, but really, an S-Corporation is a C-Corporation with an S-Corporation tax election. When the S-Corp tax election is made, the entity is telling the federal government that it would like to be taxed as a partnership rather than as a corporation. This is often done to avoid taxation at the corporate level and then again when distributions are made (at the individual level).
When the entity is taxed as a partnership, the corporation's profits pass through the entity level and are taxed only at the shareholder level. There are specific requirements that must be met to qualify as an S-Corporation, so if this type of entity is of interest, you should make sure you qualify.
A large majority of our small business customers meet the following requirements:
- Be filed as a U.S. corporation
- Maintain only one class of stock
- Maintain a maximum of 100 shareholders
- Be comprised solely of shareholders who are individuals, estates or certain qualified trusts, who consent in writing to the S Corporation election
- All shareholders must have a US Social Security Number
- Corporate fiscal year ends December 31st
Failure to observe any of the above requirements could revoke your S Corporation status at any time. Whether or not an S Corporation is something that you would benefit from is a decision that only you can make. Please consult your lawyer or CPA for details.
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To qualify as an S Corporation in the present tax year, a "calendar year" corporation must timely file IRS Form 2553 with the IRS. If a corporation was in existence prior to the present tax year, then this filing must be submitted to the IRS on or before: March 15 of the present tax year. If the corporation is a "New Corporation", then the S Corporation election may be submitted at anytime during its tax year so long as the filing is made no later than 75 days after the corporation has began any of the following activities (whichever is earliest):
- Conducted business as a corporation
- Acquired assets, or
- Issued stock to shareholders
An S Corporation begins its existence the same way that a C Corporation (discussed above) begins its existence, as a general, for-profit corporation upon filing the Articles of Incorporation at the state level. However, after the corporation has been formed, it may elect S Corporation status by submitting IRS form 2553 to the Internal Revenue Service (in some cases a state filing is required as well). Once this filing is complete, the corporation is taxed like a partnership or sole proprietorship rather than as a separate entity. Thus, the income is "passed-through" to the shareholders for purposes of computing tax liability. Therefore, a shareholder's individual tax returns will report the income or loss generated by an S-corporation.
To qualify as an S corporation, a corporation must timely file IRS Form 2553 with the IRS. This election must be made by March 15 of the current year if the corporation is a calendar-year taxpayer in order for the election to take effect for the current tax year. However, a "New" corporation may make the filing at anytime during its tax year so long as the filing is made no later than 75 days after the corporation has began conducting business as a corporation, acquired assets, or has issued stock to shareholders (whichever is earlier).
The corporation must:
- Be filed as a U.S. corporation.
- Maintain only one class of stock.
- Maintain a maximum of 100 shareholders.
- Be comprised SOLELY of shareholders who are individuals, estates or certain qualified trusts, who consent in writing to the S Corporation election.
- NOT have a shareholder who is a non-resident alien.
- Failure to observe ANY of the above requirements could revoke S Corporation status at any time.
Owners who want the limited liability of a corporation and the "pass-through" tax-treatment of a partnership will often make the S Corporation election. In most cases, corporations that would benefit from S Corporation status are those who plan on distributing the majority of earnings to its shareholders in the year those earnings are derived. Corporations who plan on retaining earnings for future investments in future tax years often choose the C Corporation because under the S Corporation, earnings will be taxed as if they were distributed to shareholders regardless of whether a distribution actually occurred or whether the corporation retained the earnings for future investment.
An S Corporation follows the same state formalities as does a C corporation (i.e. filing Articles of Incorporation and paying state fees). However, an S Corporation must make a special tax election under sub-chapter S of the Internal Revenue Code by filing IRS Form 2553. In addition, certain states require that the corporation file an S Corporation Election at the state level as well.
The S Corporation must complete and file IRS Form 1120S to report its annual income to the IRS each year.
ALL shareholders of the corporation must be U.S. Citizens or have U.S. Residency Status. If, for any reason, shares are somehow sold or transferred (even if by will, divorce, or other means) to a shareholder who is a foreign national, the corporation will lose its S Corporation status and be treated as a C Corporation.
An S Corporation that loses its status as such may not re-elect S Corporation status for a minimum of five years.
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