Form 2553: Guide to S Corp Election & Requirements

The business entity you choose to operate as is one of the most important decisions you'll make. Your selection impacts many aspects of your business, including: 

• Taxes

• Raising capital

• Personal liability

Selecting the optimal entity has numerous benefits and can make a positive impact immediately. For example, small business owners can cut their tax burden in half in their first year of operation, potentially turning a loss into a profit, with proper entity selection.

However, your business entity is not set in stone. What worked during the startup phase and in early years might not be the best for your current operations. If you're a limited liability company (LLC) owner and you've been considering transitioning to an S corporation, there are eligibility requirements you must meet, and materials you must submit, such as Internal Revenue Service (IRS) Form 2553, Election by a Small Business Corporation. Without this form, you cannot officially become an S corporation.

Use this guide to learn everything you need to know about this essential document, from information requirements to filing, to comparisons (LLCs file Schedule C (Form 1040), Profit or Loss from Business (Sole Proprietorship) vs. IRS Form 1120-S, U.S. Income Tax Return for an S Corporation for S corps, and self-employment tax on all income for LLCs vs. salary + distributions for S corps).

If the S corp switch seems daunting, remember that you don't have to navigate it alone. The decision to become an S corp is one of the most impactful financial choices you can make. The experts at 1-800Accountant, America's leading virtual accounting firm, specialize in entity formation and can provide personalized guidance and entity analysis to ensure you're making the best decisions for your business. 

Key Takeaways

• What it is: The IRS form you file to elect S corporation tax status for your business.

• Who files: Eligible domestic businesses, including LLCs and C corporations.

• When to file: For new businesses, within 75 days of formation. For existing businesses, by March 15 of the year the election is to take effect.

• Why file: To potentially save thousands on self-employment taxes and avoid the double taxation of C corporations.

• What happens next: You’ll file IRS Form 1120-S each year and issue Schedule K-1s to each owner, called shareholders.

What Is Form 2553?

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

Eligibility Requirements for S Corporations

Before taking the steps necessary to switch to an S corp from your current entity, there are several eligibility requirements that your business must meet. Once met, your business must maintain eligibility to operate as an S corp.  

Your dedicated accountant or team can confirm that your business meets all IRS requirements to qualify for S corp status.

Business requirements

There are specific requirements your business must meet to become an S corporation, including: 

• Must be a domestic business entity (like an LLC or C corp).

• Must not be an ineligible corporation. 

Ineligible corporations include certain financial institutions, insurance companies, or domestic international sales corporations.

Shareholder requirements

In addition to business requirements, your business must also adhere to stock requirements to become eligible for S corporation status, including:

• You cannot have more than 100 shareholders.

• Shareholders must be allowable, including individuals, certain trusts, and estates.

• Prohibited shareholders include partnerships, corporations, and non-resident aliens.

Stock requirements

In addition to the requirements we've covered, there are also stock requirements your business must adhere to become an S corp. While differences in voting rights are permitted, your business can issue no more than a single class of stock. 

C corporations aren't subject to this stock limitation. 

Exceptions and complex cases

Navigating S corp requirements can be tricky without experts on your side. For instance, what qualifies as an 'allowable shareholder' or 'certain trusts'? This is where professional guidance is invaluable and makes a substantial difference over doing it yourself. 

How to File Form 2553

As part of a full-service approach, a dedicated accountant handles the preparation and filing of Form 2553 for you.

However, if you'll handle the conversion yourself, keeping track of the correct filing address and meeting the strict deadlines—especially if you need to file for late relief—is crucial. An error or a missed deadline can jeopardize your S corp election for the entire tax year.

Gather all information required

The information you'll need to complete IRS 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

Step-by-step guide to fill out Form 2553

Part I: Election information

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

• Signature

Part II: Selection of fiscal tax year

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 1 and end on December 31. 

You must answer brief questions about whether you're changing or keeping the tax year your business currently follows as you complete this section. 

Part III: Qualified subchapter S trust (QSST) election

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

Part IV: Late election relief provisions

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.

When and Where to File Form 2553

Filing deadlines

There are two critical filing deadlines: one for new businesses and one for established businesses. 

• For a new business: No later than two months and 15 days (75 days) after your business formation date.

• For an existing business: No later than two months and 15 days after the beginning of the tax year, the election is to take effect (e.g., by March 15 for a calendar-year business).

Late Filing

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. "Reasonable cause" means that you took every step that an ordinary business might take to submit this form, but were still unable to make the deadline.

If you qualify, you must write FILED PURSUANT TO REV. PROC. 2013-30 at the top of Form 2553.

After You File: What To Expect

After you've filed, expect to wait between 60 and 90 days for the acceptance letter (Form CP261) from the IRS. Begin monitoring for it once the 60-day mark approaches.

Once your S corp status is confirmed, 1-800Accountant can help your newly upgraded business maintain compliance, including: 

• Setting up payroll for your reasonable salary

• Planning for quarterly estimated tax payments

This level of service is what you can expect from our ongoing tax support.

Stay compliant with expert bookkeeping

Meeting the formal requirements for your S corp, such as maintaining corporate records, begins with keeping clean and accurate books. Messy financials will almost certainly put your S corp status at risk.

S corp bookkeeping requirements include: 

• Tracking assets and liabilities separately (critical for amortization)

• Tracking revenue and expenses accurately

• Shareholder basis

Filing taxes as an S corp involves preparing and filing Form 1120-S and distributing Schedule K-1s to each shareholder. You also need to prepare and file IRS Form 941, Employer's Quarterly Federal Tax Return, to fulfill your quarterly estimated tax obligations. 

State-Level S Corp Considerations

Your business's S corp status doesn't automatically carry over to every state. In rare instances, particularly in New York and Ohio, you will need to take extra steps to ensure your business status is recognized.

Check with authorities in your state of incorporation for more information. 

Why Elect S Corp Status: S Corporations and Double Taxation

While there can be numerous benefits to operating as a C corporation, double taxation is often cited as a major deterrent to embracing this status. C corps are taxed at a flat 21% rate at the corporate level, and then again at the shareholder level once profits are distributed. S corps are pass-through entities, meaning profits and losses are passed through to the owners to be handled at individual tax rates. This is known as pass-through taxation. S corps avoid double taxation because they do not pay taxes at the corporate level, but will file a personal tax return.

1-800Accountant's year-round tax advisory can help guide you toward the optimal business structure, and our entity formation service can handle the entire process for you, starting at $0 + state fees. 

Work With S Corporation Experts to File Form 2553

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 S corp owners and entrepreneurs trust the tax professionals at 1-800Accountant for their complex financial needs.

Whether it's business tax preparation, payroll, or any of our professional accounting services, our CPAs, EAs, bookkeepers, and tax professionals offer affordable, tax-deductible solutions 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 about the benefits of professional tax expertise for your S corporation.

FAQs about Form 2553

How do you run payroll as an S corp owner?

Running payroll yourself is a frequent, time-consuming process. And if you make mistakes, expect your employees to let you know promptly. If you'll contribute regularly to your business, first establish your reasonable salary. Then, calculate withholding taxes, pay yourself and your employees, and file applicable returns. 

Can you file Form 2553 late?

It's best to file before or by the Form 2553 filing date, but that's not always possible, even if a business has made every effort to file on time. Typically, if you have a reasonable cause for missing the filing date, you might be allowed to file late. If you do file late, make sure you write the following on top of the form: FILED PURSUANT TO REV. PROC. 2013-30.

Does the S corp structure offer asset and liability protection?

An S corp is its own legal entity separate from its owners. Because of this separation, an owner's personal assets are protected in the event of legal action against the business. While asset and liability protection is a popular reason to operate as an S corp, you must make every effort to remain compliant. Failing to follow corporate formalities may result in the loss of these protections and your business's status as an S corp. 

Can an LLC file Form 2553?

Yes, an LLC can file Form 2553 with the IRS to change its current status to an S corp, which is a tax classification. The steps your LLC would take to prepare and file materials and meet eligibility are similar to filing for this status yourself. 

Do I need a new EIN after my S corp election is approved?

No, you typically wouldn't file for a new EIN once you operate your business as an S corp. You will, however, need an EIN to complete Form 2553, among other important actions an EIN can help with, including hiring employees and opening a business bank account. 

What tax forms do S corps file after approval?

You will need numerous forms once your S corp status has been approved. Common forms you'll need include IRS Form 941 for quarterly estimated tax payments, Form 1120-S, which is an informational return, and Schedule K-1, which each owner uses on their personal income tax returns. Check with state tax authorities, the IRS, or your accountant for a complete list of forms you may require. 

How can I revoke my S corp status?

Submit a written statement of revocation to the IRS, signed by shareholders who own more than 50% of the business, as shareholder consent, to revoke your business's S corp status. The steps you'll take vary slightly depending on whether your business is an LLC or a corporation.  

What happens if I miss the 75-day deadline for Form 2553?

You can see if the IRS will allow you to submit the form late, which typically requires a cause. If that doesn't work, your business will be taxed as its current entity type for the year, which may result in a higher tax bill versus operating as an S corp for the year.

Can I retroactively apply S corp status to the start of the year?

Yes, you can retroactively apply S corp status to your business to the start of the year.

What is a reasonable salary for S corp owners, and why does it matter?

If you provide significant services to your S corp, you must take a "reasonable salary" that's in line with similar business roles in your state and industry. This is a legal type of tax avoidance that can significantly reduce the 15.3% self-employment tax that funds Social Security and Medicare. The reasonable salary will be subject to payroll taxes, while S corp distributions you receive avoid this taxation. 

Will electing S corp status affect my ability to get a business loan?

Yes, your S corp status can affect your ability to get a loan, particularly when it comes to a personal income assessment. While this status won't prevent you from obtaining a loan, your status as an S corp owner requires different documentation, which may complicate a prospective lender's evaluation.

Does S corp status affect my ability to take owner draws?

An S corp's shareholder distributions are considered to be an owner's draw, which you can take after determining a reasonable salary. Professional expertise can ensure that you're taking optimal distributions without undermining your business. 

Can a multi-member LLC file Form 2553 to become an S corp?

Assuming the multi-member LLC meets eligibility requirements and has consent from its members, it can file IRS Form 2553 to convert to an S corporation. While a multi-member LLC is taxed like a partnership by default, a successful S corporation election will change this.