An S-Corporation is not actually a different business entity structure. It is a tax designation assigned by the Internal Revenue Service. An S-Corporation elects to pass corporate income, losses, profits and deductions through to its shareholders. Shareholders then report these profits and losses on their personal income tax returns.
For a standard corporation, this is a totally different method of taxation. Standard corporations, called C-Corporations, are taxed at the entity level (a corporate tax paid by the business itself) and then shareholders pay taxes on their individual shares of distributions (the profits on their shares of stock).
S-Corporations, then, are taxed more like an LLC. An LLC passes all profits and losses straight through to its members, and members pay on their individual returns.
But an S-Corporation is not simply an LLC in disguise. There are a number of important differences between S-Corporations, LLCs and C-Corporations.
S-Corporation Eligibility
Not every business is eligible for S-Corporation status. In order to be eligible, your company must meet all of the following requirements:
- Be a domestic business
- Have only allowable shareholders
- May be individuals, certain trusts, estates and certain exempt organizations
- May not be partnerships, corporations or non-resident aliens
- Have no more than 100 shareholders
- Have only one class of stock
- Not be an ineligible business (certain financial institutions, insurance companies, and domestic international sales companies)
Most small businesses meet these standards, but it’s important to understand that these limitations remain in place after status is granted. An S-Corp can never sell stock to a corporation or partnership or have more than 100 shareholders.
S-Corporation Election Forms:
IRS Instructions for Form 2553
Distinguishing Features of an S-Corporation
Differences from C-Corporations
- An S-Corp is taxed differently than a C-Corp. With an S-Corp, the profits and losses “pass-through” the entity straight to the shareholders. Taxes are paid on those profits and losses on each shareholder’s individual tax return.
- An S-Corp can file its taxes only once a year (unless it has employees), rather than quarterly as a C-Corp would.
- An S-Corp does not pay a tax at the entity level, as a C-Corp does.
- An S-Corp is limited to 100 shareholders. C-Corps can have an unlimited number of shareholders.
- The shareholders of an S-Corp must all have the same type of stock and the same rights granted by that stock. C-Corps can have multiple stock classes with differing rights and benefits.
Differences from LLCs
- An S-Corp must pay each shareholder a reasonable salary, as well as assign profits in the form of distributions. In an LLC, members are not required to be paid a salary. Salaries are subject to FICA taxes, but distributions are taxed at a much lower rate.
- An S-Corp must distribute profits in proportion to the capital contributions of each shareholder. An LLC, however, can make distributions however it sees fit, and those distributions do not have to be in proportion to a member’s contributions.
- An S-Corp must adopt the administrative structure of a corporation, including appointing a Board of Directors and corporate officers, holding shareholder meetings, and publishing shareholder annual reports.
- An S-Corp has an indefinite existence. Even if shareholders leave the company, the S-Corp continues to exist. An LLC, by contrast, will often be dissolved upon any member leaving the company.
Filing the S-Corp Election (Form 2553)
To make an S-Corp election, you must complete and file the Form 2553 with the IRS. The form can be mailed or faxed.
Form 2553 should be filed either:
- 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 the election is to take effect
The office you file with depends upon which state your corporation’s principal business office is located in.
If your principal office is located in the following states:
CT, DE, D.C., FL, GA, IL, IN, KY, ME, MD, MA, MI, NH, NJ, NY, NC, OH, PA, RI, SC, TN, VT, VA, WV, or WI
mail/fax your application to:
Department of the Treasury
IRS Center
Cincinnati, OH 45999
Fax: 859-669-5748
If your principal office is located in the following states:
AL, AK, AZ, AK, CA, CO, HI, ID, IA, KS, LA, MN, MS, MO, MT, NE, NV, NM, ND, OK, OR, SD, TX, UT, WA, or WY
mail/fax your application to:
Department of the Treasury
IRS Center
Ogden, UT 84201
Fax: 801-620-7116
Once your Form 2553 is submitted, the IRS will inform you that the election has either been accepted or rejected. This determination is generally made within 60 days.
Once the S-Corp election has been made, it will remain in place until either the election is terminated or revoked.
Filing Notes
- You must have an EIN in order to apply for S-Corp status.
- The Form 2553 must be signed and dated by an officer authorized to sign.
- You must include the Social Security Numbers of all members/shareholders who are required to consent to the election.
- You should send the application by certified mail and keep the certified receipt. The IRS will accept this as evidence the Form 2553 was filed in the case that the form is lost.