How to Make the S-Corp Election

How to Make the S-Corp Election

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As you may have learned in What is an S-Corp, an S corporation has quite specific requirements, but the tax saving pay off can be huge for your small business! If you follow the steps, obtaining S-Corp status doesn’t have to feel like a headache. Of course, the truly headache-free strategy is to hire a small business accountant like us to do it for you and watch your tax savings roll in. But for you overachievers, let’s lay out the necessary steps in order to make the S-Corp election. It’s totally doable for a small business owner to make the S-Corp election without hiring a CPA firm.  In fact, it’s just 3 steps.

3 Steps to Make the S-Corp Election

Step 1: Make Sure Your Business is Actually a Business (AKA Register)

It may seem redundant, but before you can proceed with an S-Corp election or getting those tax savings, your small business must be registered at the state level. The S-Corp election is a tax designation, not an entity used for incorporation. The most common business structures are LLCs and C corporations, and even if you plan to make the S-Corp election, different  initial business structures can have different implications “What is the Best Legal Entity Type for an S-Corp?” is a great resource if you don’t yet have an entity type. We can’t stress enough how important it is to consult a small business tax accountant to make sure you’re registering your business correctly for your small business’s goals, size and plans. 

Step 2: Check (Then Double Check) Eligibility

It’s worth repeating that S-Corp status has specific requirements and eligibility criteria, and it’s important to be sure that your small business meets these requirements before trying to make the S-Corp election. Read, Who Can Make the S-Corp Election or speak with a CPA Firm or small business tax professional to decide if your small business is eligible. The general eligibility criteria includes: 

  • Business is an eligible US company
  • The business has 100 shareholders or less 
  • The business has only one class of stock 

Step 3: File the S-Corp Election (Here’s the Form)

Any corporation that meets the eligibility requirements can make the S-Corp election by filing Form 2553 (Election by a Small Business Corporation) with the IRS. The form may be filed by mail, private delivery service or fax, but the most important thing is that you file it on time! Keep reading to figure out what “on time” means to you.

Note: The only way to obtain proof of filing Form 2553 is mailing by certified or registered mail with a return receipt or using an approved private delivery service, which provides a copy of the receipt showing the date and time of the pickup. It may be beneficial to file your S-Corp election in one of the above two ways to guarantee that you have proof of the form being filed in a timely manner.

Preparing the IRS Form for S-Corp Election

The hardest part about the form is probably just getting consent and signatures from all your partners/shareholders and an officer of the corporation (but if you’re a small business owner, that’s probably you). . To make it even harder, if any of your shareholders reside in a community property state (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin), the spouse of the shareholder must also sign the form.

Once your small business decides to make the S-Corp election, it is strongly encouraged to begin preparing the IRS form as soon as possible to avoid any difficulties such as:

  • Being unable to locate or contact a shareholder in time to consent to the election before the filing date. 
  • A shareholder changing his or her mind and deciding against making the S-Corp election. 
  • A shareholder selling or transferring stock to an ineligible S-Corp shareholder or one that does not consent to the S-Corp election. 
  • A shareholder experiencing personal changes making it difficult to obtain consent such as divorce or physical/mental incapacitation.

When to File the IRS Form for S-Corp Election

Timing when to submit the form to the IRS and securing S-Corp status for your small business is an important step to consider and can vary depending on a variety of factors such as whether your corporation previously existed or is being newly formed. The timing can get tricky and since we want to make sure your small business is saving money on taxes as soon as possible, we have a whole article breaking down the filing process and timing for different possible scenarios called When to Make the S-Corp Election. It also may be helpful to talk to a CPA Firm specializing in accounting for small businesses to receive guidance on the timing for incorporating and making the S-Corp election to guarantee that your S-Corp election will be successful in the earliest tax year possible.

Terminating S-Corp Status

Making the S-Corp election comes with certain requirements that must be met on an ongoing basis, otherwise the S-Corp status may be involuntarily terminated. Check out, How to Keep the Status S-Corp to learn more about it. 

Is There an Undo Button?

Yes. Assuming the S-Corp election is not involuntarily terminated, an S Corporation may voluntarily revoke its status at any time if the corporation determines it is no longer beneficial to the business. Revoking the S-Corp status requires a majority of stockholders, regardless of voting rights, and a notice to the IRS.

The S-Corp election can save small businesses a good amount of money on taxes as well as providing other benefits. What is an S-Corporation lays out the most obvious of these benefits, but certain business plans or expected changes may result in another tax status better serving the corporation. For example the desire to admit a corporation shareholder or issue preferred stock. This knowledge that the S-Corp election is reversible if need be, should give small business owners comfort when deciding whether or not to make the S-Corp election.

Key Takeaways

  • Must register your business first 
  • Must check S-Corp eligibility 
  • Prepare ahead and then file the IRS Form 
  • S-Corp status is reversible with a majority

As always, talking to a small business accountant or bookkeeper is the best way to find out how the S-Corp election could work for your small business and save you the most money on your small business taxes.