Are you thinking of setting up an S-Corp? This guide provides everything you need to know about filing IRS Form 2553 and making the election. We’ll cover what information is necessary on the form, when you need to file it, and how to go about making the switch from a regular corporation.
What is Form 2553?
You can form a corporation or LLC by registering your business with a state – the business does not need to exist in your state of residence. Once you’ve registered as a corporation with a state, you can file for an EIN from the IRS, which allows you to open bank accounts, file taxes, and process payroll.
When business owners register their small business as a corporation with the IRS, they incorporate as a C-Corporation. For LLCs with multiple members, the businesses are basically partnerships for tax purposes. A single-member LLC defaults to sole proprietorship tax rules.
If a corporation or LLC wants to be an S-Corporation, the business must file IRS Form 2553 to elect to be an S-Corporation.
S Corp vs C Corp: Which is Best?
Both S-Corporations and C-Corporations are separate entities from their owners. The critical difference between the two types of entities is the tax on business profits, whether you are a large company or a small business.
C-Corporations pay income tax at the corporate level. They are subject to corporate tax rates and will pay tax on any business profit. The shareholders must get a salary, take dividends from the company, or receive a loan from the business to take money out of a C-Corporation. Any loans from the business must be eventually repaid, and will need to charge interest on the loan to prove that the distribution was a loan and not dividends. C-Corps can lead to double taxation, since the corporation has paid tax on the business profit, and then the shareholder pays taxes on any dividends received.
The IRS taxes S-Corp profits on the shareholder’s tax return. First, the company’s profits show on Schedule K-1. This shows each shareholder’s portion of the business’s profit (or loss). From there, the income ends up on the shareholder’s income tax return. The tax on that income depends on the shareholder’s tax bracket. As a result, S-corporation shareholders can take distributions from the company at any time without the withdrawal being a taxable event (unlike C-Corp dividend distributions, which are taxable events).
Determining which structure is better for your corporation will depend on your long-term goals. For example, if you intend to have more than 100 shareholders or do not want to make distributions solely based on ownership interest percentages, then a C-corporation is better. On the other hand, if you only have a few shareholders, an S-corporation allows you to withdraw funds from the business quickly and without triggering taxes.
Who Can File Form 2553?
There are several criteria that your corporation must meet to file Form 2553:
- Your corporation must be domestic.
- The corporation can’t have more than 100 shareholders. (Married couples can be treated as one shareholder when calculating the total number of shareholders).
- Your corporation can’t have any nonresident alien shareholders.
- The corporation must not have more than one class of stock – see note below.
- In most cases, the shareholders must be individuals, estates, and exempt organizations, not corporate entities.
- The corporation must file Form 2553 on time.
Note that the requirement only to have one class of stock means that all shareholders must receive distributions in proportion to their company ownership. If distributions pay out disproportionally, that creates a second class of stock and voids the election to be treated as an S-Corp.
How to File Form 2553
You only need to file Form 2553 once. The form must be filed within two months and 15 days of the beginning of the tax year that the business is choosing to be an S-Corp. You can make a late S election; however, you will need to provide reasonable cause as to why the election is late.
There are several steps to file Form 2553:
- Download the form from the IRS website.
- Fill out your company’s contact information in Part I and select your tax year (which is almost always a calendar year for s-corporations). Include an explanation for the reasonable cause for filing late if you submit Form 2553 after the due date.
- A company representative must sign the bottom of page 1.
- Page 2 includes a listing of all shareholders. If shareholders are married and live in a community property state, their spouse must also sign their consent.
- Most corporations do not need to fill out pages 3 and 4.
- You must submit Form 2553 on paper and mail it to the address included in the PDF file, which varies by state of incorporation.
There are no fees to file Form 2553.
How do I know if my 2553 Form was approved?
Though processing times vary, most companies receive a response to their Form 2553 filings within 60 days.
With staffing shortages at the IRS, Form 2553 approvals have taken as long as six months in recent years.
How to get a copy of your 2553
If your business becomes an S corporation, you must keep a copy of your 2553 in your records to file your taxes. If you misplace Form 2553, you’ll need to contact the IRS for a new one.
You can access a PDF of IRS Form 2553 here.
You will not be able to electronically file your taxes as an S-corporation until the IRS has processed your election. Therefore, you may have to submit your first S-corporation return on paper.
If you need a copy of your Form 2553, you can follow these steps:
- First, make sure you can conduct business transactions on behalf of the corporation.
- Next, call the IRS Business and Specialty Tax line at 1-800-829-4933
- Request a copy of Form 2553.
- When speaking to the IRS, you’ll need to confirm your identity by providing identifying information, including your corporation’s name and address, your name and role within the company, your Employee Identification Number (EIN), and the business’s contact details.
Filing Form 2553 is relatively straightforward, but you must ensure the filing is complete by the deadline. An S-corporation election can save you from double taxation and allow flexibility in how you withdraw funds from your business.
Want help deciding if your corporation should be a C-corp or an S-corp? Our tax professionals have the knowledge and experience you need to navigate the decision-making process. Contact us today to schedule your complimentary tax brainstorming session.