IRS Form 2553: How to Get Recognized as an S Corporation

The entity you choose can have serious implications for you and your business, including taxes, raising capital, and personal liability. Selecting the right entity has numerous benefits and can make a positive immediate impact. For example, small business owners who select their optimal entity can cut their tax burden in half in their first year of operation, potentially turning a loss into a profit.

Your business entity is not set in stone. If you've been considering transitioning from your current entity to an S corporation, there are eligibility requirements you need to know about, as well as Form 2553. Without Form 2553, you cannot officially form as an S corporation. Use this guide to help you learn everything you need to know about this essential document, from information requirements to filing. 

What is IRS Form 2553?

You would submit Form 2553 to the IRS to elect to transition from your current entity to S corporation status. An S corporation election has numerous benefits, including how your business will be taxed.  

Eligibility Requirements for S Corporations

For your business to qualify for S corporation status, it must meet these eligibility requirements: 

• Your business must be a domestic corporation. 
• You must only have allowable shareholders. Individuals, certain trusts, and estates are allowed, while partnerships, corporations, and non-resident alien shareholders are not. 
• Your business must have 100 shareholders or less and only one class of stock. 
• Your business cannot be an ineligible corporation like an insurance company.

Use 1-800Accountant's tax advisory service to help you determine eligibility. 

How to File Form 2553

To become an S corporation, you must complete and submit Form 2553 with the signatures of all shareholders. The form has four main parts. 

Information Required

The information you'll need to complete Form 2553 includes: 

• Business name 
• Business address
• Incorporation date
• Employer identification number (EIN)
• Corporate contact for the IRS
• The tax year to begin your business's S corp status 
• Shareholder information, including name, address, Social Security number (SSN), and the number of shares

Instructions To Fill Out Form 2553

In Part I of Form 2553, you would share information about your business and its shareholders, including your business name, address, and incorporation date. Each shareholder is required to provide their information and consent, including their name, address, and signature.

You would select your fiscal tax year in Part II of Form 2553. Although you can use a non-calendar tax year, most businesses start their fiscal tax year on January 1st and end on December 31st. You must answer brief questions about whether you're changing or keeping the tax year your business currently follows.

Part III is specifically for trusts attempting to change their entity to an S corporation. Leave this section blank if it does not apply to your business. This section asks for the beneficiary's name, address, SSN, etc.

The final section of Form 2553 may be left blank unless you're filing late. Once the tax year starts, You have two months and 15 days to file from the beginning of the tax year for your S corporation to remain in the same fiscal year. If you abide by the calendar tax year, the deadline is March 15th.

Filing Form 2553

Once you’re ready to file IRS Form 2553, you can send your materials to the Department of the Treasury Internal Revenue Service Center. There are two locations and two ways to send your materials: by mail or fax. The location where you'll send your original Form 2553 depends on the state your business is headquartered in. 

Advantages of Filing Form 2553: S Corporations and Double Taxation

When the same source of income is taxed twice, it is referred to as double taxation. This is a common occurrence for C corporations, where they will first pay taxes on profits. This income is taxed again when it is distributed to shareholders as dividends.

This is not the case for other entities, including S corporations and limited liability companies (LLCs). S corporations and LLCs offer limited liability protection and pass-through taxation, meaning revenue is passed through to ownership to address on their personal tax returns. There are also distinct differences between these entity types.

• Ownership and Structure. S corporations have more restrictions on ownership, such as a limitation on the number and type of shareholders. LLCs are usually formed by sole proprietors, which allows for greater flexibility in ownership and management structures.
• Self-Employment Taxes. S corporations shareholders who actively participate in the business can potentially save on self-employment taxes by paying themselves a reasonable salary and taking the remaining profits as distributions. In an LLC, all members are subject to self-employment taxes on their share of the profits.
• Formalities and Compliance. S corporations have more formalities and compliance requirements, including the need for annual meetings, minutes, and maintaining certain corporate records. LLCs have fewer formalities and less stringent compliance obligations.
• Investor Attraction. If attracting outside investors or venture capital is a priority, LLCs may face challenges due to their less traditional ownership and management structure. With their ability to issue multiple classes of stock, S corporations are more appealing in this scenario.

Can You File Form 2553 Late?

While you can technically file Form 2553 throughout the year, you might consider it a late filing if you miss the two-and-a-half-month deadline from the start of your fiscal year. You might be eligible to file late if you meet specific requirements, such as having a reasonable cause for missing the deadline. If you qualify, you must write FILED PURSUANT TO REV. PROC. 2013-30 at the top of Form 2553.

Work With S Corporation Experts

From the information-gathering process to wrangling partners to meeting the deadline, preparing Form 2553 to transition your business to an S corporation requires a lot of work. That's why so many busy owners and entrepreneurs trust the tax professionals at 1-800Accountant, America’s leading virtual accounting firm for small businesses, for their financial needs.

Whether it's business tax preparation, payroll, or any of our professional accounting services, we have the affordable pricing solutions you need to help your S corporation stay compliant and ready for the fiscal year. Schedule a quick consultation – usually 30 minutes or less – to learn more.