An S-Corp election is made by filing IRS Form 2553, and for it to apply to a tax year it generally has to be filed no later than two months and 15 days after that tax year begins, or at any point in the tax year before it. An S-Corp is not a type of company but a tax status: an LLC or corporation chooses to pass its income through to the owners instead of paying corporate income tax. Before you file, there is one important point for international founders: the S-Corp rules do not allow non-resident alien shareholders.
What an S-Corp election does
A regular C-Corporation pays tax on its profits, and shareholders pay tax again on dividends. An S-Corp generally pays no federal income tax at the company level. Profits and losses pass through to the owners and are reported on their own returns. S-Corp owners who work in the business must also be paid a reasonable salary, which is subject to payroll taxes, while the remaining profit is not subject to self-employment tax.
Who is eligible
To qualify, the company must:
- Be a domestic corporation or an LLC that elects to be taxed as one.
- Have no more than 100 shareholders.
- Have only eligible shareholders: individuals who are U.S. citizens or residents, estates, certain trusts and certain tax-exempt organizations. Partnerships, corporations and non-resident aliens are not eligible.
- Have only one class of stock.
If any owner is a non-resident alien, the company cannot be an S-Corp. Many foreign founders of U.S. LLCs are in this position, so check the owners' tax residency before you file.
The Form 2553 deadline
For the election to take effect at the start of the current year, file Form 2553 within two months and 15 days of the start of that tax year. For a calendar-year company, that means by March 15. For a new company, the clock starts when the company first has shareholders, acquires assets or begins business, whichever is first. If you miss the deadline, the IRS offers late-election relief under Rev. Proc. 2013-30 when there was reasonable cause and all owners reported income consistently with an S-Corp, so ask a tax professional.
How an LLC elects S-Corp status
An LLC does not need to file a separate form to be taxed as a corporation first. If it meets the requirements and files Form 2553 on time, the IRS treats it as having elected to be taxed as a corporation and then as an S-Corp. Every shareholder must sign the consent on the form.
How to fill out Form 2553
- Enter the company name, EIN, address, date and state of incorporation or formation.
- Enter the effective date of the election (the tax year it begins).
- List each shareholder's name, address, number of shares or percent of ownership, and tax year.
- Have each shareholder sign the consent statement.
- Sign the form as an authorized officer and send it to the IRS service center indicated in the form instructions.
After the election
The IRS usually sends an acceptance letter (CP 261). Keep it with your records. From then on, the company files Form 1120-S each year, and issues a Schedule K-1 to each shareholder. See our US company tax preparation service. If your LLC has several members and you prefer partnership taxation instead, read about the partnership election.
Is S-Corp status always better?
No. It can reduce self-employment tax for profitable businesses with active owners, but it brings payroll requirements, stricter ownership rules and added filings. A business with low profit may pay more in admin costs than it saves.
Frequently Asked Questions
What is the deadline for Form 2553?
Two months and 15 days after the beginning of the tax year in which you want the election to take effect. For a calendar-year entity, that is March 15.
Can a non-resident alien own an S-Corp?
No. Non-resident aliens are not eligible S-Corp shareholders, so a company with such an owner cannot be an S-Corp.
Does an LLC need to file Form 8832 before Form 2553?
Not if it qualifies and files Form 2553 on time. The Form 2553 election covers the choice to be taxed as a corporation.
Can I file Form 2553 late?
The IRS has late-election relief if you had reasonable cause and meet the conditions. Ask a tax professional whether you qualify.
What is the difference between an S-Corp and a C-Corp?
A C-Corp pays corporate tax on its profit. An S-Corp passes income through to its shareholders, who pay tax on their own returns.
Want help deciding and filing? See our S-Corp election service.
