IRS Form 2553: How to Elect S Corporation Status

What Form 2553 does

Form 2553 is the Election by a Small Business Corporation. Filing it asks the IRS to treat your company as an S corporation for federal income tax purposes.

An S corporation is a tax status, not a type of company. A corporation or an LLC can choose it. Profits and losses pass through to the owners and are reported on their personal returns, like a partnership. The business generally does not pay federal income tax at the entity level.

The attraction is how owner income is treated. Owners who work in the business must be paid a reasonable salary subject to payroll taxes, and remaining profit can be taken as distributions that are not subject to self-employment tax. The details are specific to your situation, so confirm with a tax professional. For the structural options, see C corp vs. S corp and a single-member LLC taxed as an S corp.

Who is eligible

To qualify, the company must be a domestic corporation or an eligible LLC, have a limited number of eligible shareholders and only one class of stock. Check the IRS instructions for the current rules.

Key requirements generally include:

• A domestic entity that is a corporation, or an LLC that has elected corporate treatment
• Shareholders who are individuals, certain trusts or estates, not most partnerships or corporations
• A shareholder count within the IRS limit
• One class of stock
• All shareholders consenting to the election

Certain financial institutions and other entity types are excluded. Read the form instructions at IRS.gov or ask your accountant to confirm eligibility. If you are still choosing a structure, our guide to choosing the right business entity is a good starting point.

The deadline

The election generally must be filed no more than two months and 15 days after the start of the tax year it takes effect, or at any time during the prior year. Late relief may be available.

For a calendar-year company wanting S status for a given year, that usually means filing by mid-March of that year. A new company counts the two months and 15 days from its first day of existence, not from the calendar year.

If you miss the date, the IRS offers late-election relief in some cases when you had reasonable cause. Do not assume you qualify. Ask your tax professional, and check IRS guidance for how to request relief. Marking your calendar before you form the company avoids the issue entirely.

What you fill in

The form asks for the company's name, address and EIN, the election's effective date, tax year and each shareholder's name, address, ownership and signed consent.

Gather these before you start:

1. Legal name, address and EIN of the business. If you do not have an EIN yet, see IRS Form SS-4.
2. Date and state of incorporation or formation
3. Requested effective date of the S election
4. Tax year, usually the calendar year
5. Names, addresses, tax ID numbers and ownership share of every shareholder
6. Signatures of an authorized officer and every shareholder consenting

Errors or missing signatures can cause rejection or delay. Keep a copy of what you filed and proof of how and when you sent it.

What changes after the election

Owner-employees must run payroll and take a reasonable salary, and the company files a separate S corporation return. Expect more bookkeeping and higher accounting costs.

S status brings obligations:

• Run payroll for owners who work in the business and pay payroll taxes. See how to do payroll.
• File an annual S corporation return and give each shareholder a Schedule K-1.
• Keep clean books and track basis, distributions and shareholder loans.
• Follow state rules, since some states treat S corporations differently.

Good bookkeeping matters more, not less. Compare the savings against added accounting and payroll costs. For a small profit, the election may not be worth it.

How it connects to funding

Funders look at bank deposits, credit and revenue more than tax election. But clean records and paying yourself properly make a file easier to review.

Your tax election does not by itself change whether you can get funding. ROI Funder reviews your application and 3 months of business bank statements, and considers 500+ FICO, 6+ months in business and $20,000+ monthly revenue. What does help is organized books, steady payroll and distributions that make sense in the account activity.

If you need capital, compare working capital and a line of credit. Applying takes minutes with a soft credit pull. Keep your accountant in the loop on how a funding payment affects cash flow and taxes.