S-Corp Election
S-Corp Election Services from vState Filings
For many small businesses, choosing how the company will be taxed is just as important as choosing the business structure itself. An S-Corp election offers a powerful way to streamline taxes, reduce self-employment burdens, and maintain the liability protections of a corporation or LLC.
Instead of creating a new business entity, this election simply changes how your existing corporation, or LLC treated as a corporation, is taxed under the IRS Subchapter S rules. Before deciding if this option is right for you, it’s important to understand how S-Corp taxation works, the advantages it can offer, and the requirements you must meet to qualify.
What is an S-Corp Election?
An S-Corp election refers to a tax designation under Subchapter S of the Internal Revenue Code. Rather than being a separate type of business entity, it is an election by an existing corporation (or an LLC treated as a corporation) to be taxed as an S corporation.
This election allows business profits, losses, deductions, and credits to “pass through” to shareholders, avoiding double taxation at both the corporate and individual levels.
With an S-Corp election, the company itself does not typically pay federal income tax. Instead, the tax obligation flows through to the shareholders, who report it on their personal tax returns.
Why Choose S-Corp Status?
1. Potential Tax Savings
One of the strongest incentives for electing S-Corp status is the possibility of saving on self-employment taxes. In a sole proprietorship or standard LLC taxed as a partnership, all profits are generally subject to self-employment tax. But with S-Corp status, owners may receive part of their income as salary (which is subject to payroll taxes) and part as distributions (which may avoid self-employment tax).
These distributions, when properly structured, can reduce your overall payroll burden, though the compensation must be “reasonable” under IRS guidelines.
2. Pass-Through Taxation and Simplicity
Because income passes through to shareholders, the business avoids being taxed at the corporate level. This structure simplifies taxation and aligns with many small businesses’ goals of avoiding double taxation.
3. Liability Protection and Business Credibility
An S-Corp remains a corporation or LLC at its core, with the benefit of limited liability for its shareholders. In addition, using the formal structure of a corporation can enhance legitimacy with customers, partners, and lenders.
4. Better Audit Position
In some cases, shareholders feel that S corporations are viewed with less risk by the IRS than sole proprietorships, though this is not guaranteed.
Eligibility Requirements & Limitations
Not every business qualifies for S-Corp status. You must satisfy several requirements:
- Be a U.S. domestic corporation or an LLC that elects corporate status
- Have no more than 100 shareholders
- All shareholders must be U.S. citizens or resident aliens
- Only one class of stock may be issued
- Shareholders cannot be other corporations or partnerships
- Certain types of businesses (for example, some financial institutions or insurance entities) are ineligible
If your business meets these criteria, you can proceed with filing.
How to File an S-Corp Election (Form 2553)
To elect S-Corp status, you must complete and submit IRS Form 2553, Election by a Small Business Corporation.
Here’s a simplified overview:
- Prepare the Form: Provide basic corporate information (name, address, EIN, incorporation date, shareholder info, etc.). Each shareholder must consent in writing.
- File on Time: The standard deadline is within two months and 15 days after the beginning of the tax year when you want S status to take effect. For calendar year taxpayers, that is typically March 15. If you miss that deadline, you may still qualify for late election relief if you meet certain criteria.
- Submissions: The form must be mailed or faxed (no IRS option to file Form 2553 online). After filing, the IRS typically issues a determination letter within 60 days.
Once accepted, your corporation will be taxed as an S corporation, and you must file IRS Form 1120-S annually.
Benefits vs. Drawbacks: Things to Watch Out For
Pros
Tax Efficiency
Ability to split compensation and distributions can reduce self-employment tax burden
Pass-Through Simplicity
Avoid corporate income tax
Liability Protections
Maintain a centralized compliance record for every entity
Enhanced Credibility
Formal structure can help with stakeholders
Cons/Challenges
Payroll and Compliance Requirements
You must treat shareholder-employees as employees, pay a “reasonable salary,” withhold and remit payroll taxes, and maintain payroll compliance.
Increased Reporting Complexity
Filing Form 1120-S requires a balance sheet and worksheet for shareholders’ equity (which is more complex than a Schedule C in a sole proprietorship).
Higher Professional Fees
Your accountant or tax advisor may charge more for preparing corporate tax returns and payroll reports.
Risk of IRS Reclassification
If your salary to shareholder-employees is deemed too low, the IRS may recharacterize distributions as wages and impose penalties.
Because of these trade-offs, making an S-Corp election is best done with guidance from a qualified tax advisor, like the experts at vState Filings.
Why Trust vState Filings for Your S-Corp Election
At vState Filings, we help business owners navigate entity formation, compliance, and tax elections with confidence.
When you work with us on your S-Corp election, you can expect clear guidance through every step of the process, assurance that your Form 2553 is completed accurately and filed on time, and seamless coordination with your accountant or tax advisor.
We also provide ongoing support to help maintain your corporate compliance. If you have questions or are ready to get started, call us at 866-496-0279. We’ll walk you through the requirements and help you determine whether an S-Corp election is the right choice for your business.
Start Your S-Corp Election Process Today
If you believe your business is ready for S-Corp status, don’t hesitate to reach out. Electing S-Corp status can be a powerful tool for optimizing your tax position and structuring your business smarter. With professional guidance from vState Filings, you can move confidently rather than navigating the complexity alone.
