Getting a corporation designated as an “S” can be a bit complicated. If that is the goal, here is how it is done.
“S” Corporation
The “S” in S corporation refers mostly to a tax classification. Choosing S corporation status does carry legal ramifications, such as a cap of no more than 75 investors, but the classification really centers on pass-through tax treatment.
To become an S corporation, you need to file an election with the IRS. Usually no paperwork needs to go to any state entity, but check your specific jurisdiction to be sure. Regardless, the filing with the IRS uses Form “2553 — Election by a Small Business Corporation.”
To file Form 2553, you will need to provide the following details:
- The name and address of the corporation,
- The tax year to be covered by the election,
- The date the corporation initially had investors or started operating,
- The name, address and social security number of EACH investor, and
- The signature of EACH investor.
Miss even one of those items, or one missing signature, and the IRS can bounce the whole filing back to you. If your investors are scattered around the country, filing an “S” election can get complicated fast. Getting everybody to track down the form, read it, and sign off takes time, and time is not on your side.
Time Requirements
The IRS puts strict deadlines on filing “S” elections. In technical terms, the election needs to be filed prior to the 15th day of the 3rd month of the tax year for which you are choosing the status. The IRS, ever the poet.
In plain terms, you need to file the election within 75 days of incorporation. From a practical standpoint, get the election signed and submitted as quickly as you possibly can. If the IRS flags a late filing, you should also send the election by registered mail, so you have some proof it went out.
It is not entirely clear why, but the IRS gets particular when it comes to S elections. Follow the steps above and get the filing in as quickly as possible, and things should go smoothly.
In short, the “S” in S corporation is a tax classification built around pass-through treatment, not just a label. Filing means submitting Form 2553, Election by a Small Business Corporation, to the IRS, with every shareholder’s signature attached. Also worth a read is our article When the elections come and there is a heated argument that tops the views of all, there are some years.
The IRS puts stringent due dates on filing “S” elections, so do not let the form sit once it is signed.