I’m going to be posting a number of posts on the ins and outs of electing and operating a corporation which elects to be taxed as a small business corporation (an “S Corp”) with the IRS.  There are many benefits to such an election, but there are also pitfalls that many owners run into that could jeopardize the election.

The first post in this series is simply how to make the election.

In order to make the election, a business corporation, or an LLC electing to be taxed as a business corporation, must file Form 2553 with the IRS.  It must be signed by all shareholders (or members) of the company.

In order to be eligible to even make such an election, the company must meet certain criteria:

  • It must be a domestic corporation (i.e. formed under the laws of one of the states)
  • Have only certain type of shareholders
    • including individuals (and sole member LLCs), certain trusts, and estates but
    • not partnerships, corporations, multi-member LLCs, or non-resident aliens
  • It cannot have more than 100 shareholders/members
  • It may only have one class of stock (this is viewed from an economic as opposed to voting/control perspective, so that there can be two classes as long as both classes have the same economic rights – that is rights to distribution and liquidation proceeds).
  • It cannot be an ineligible corporation (i.e. certain financial institutions, insurance companies, and domestic international sales corporations).

The election must be made by mailing the Form 2553 to the proper IRS office by these time periods:

  • No more than two months and 15 days after the beginning of the tax year the election is to take effect, or
  • At any time during the tax year preceding the tax year it is to take effect.