What Are The Requirements For An S Corporation and How Do I Set One Up?

This is Part 4 in a series of ours. If you have not read our previous articles do that first:

What is a Pass Through Entity?

What Is An LLC and How Is It Different From An S Corporation?

What Is An S Corporation And Why Should I Elect To Be One?

In this article we are going to talk about what the requirements to be an S Corporation and how you set one up.

1. What Are The Requirements For An S Corporation?

To be classified as an S Corporation there are a few requirements that must be met.

• Must be organized initially as an LLC or Corporartion. Remember this is simply a tax election so you must first have a company open. If you are currently operating as a Sole Proprietor you will need to open an LLC or Corporation and then elect S Corp status. Any activity under the sole proprietorship will need to be filed as such and cannot be claimed under the S Corp.
• Shareholders may be individuals, certain trusts, or estates. May NOT be a: partnership, corporation, or non-resident alien.
• Cannot have more than 100 shareholders.
• Can only have one class of stock.
• All shareholders must consent to the election.

Although these requirements may seem scary, the majority of clients we talk to do not run into any of these issues.

You may have noticed that partnerships or other corporations cannot be shareholders. If you are in a situation where you are working with other owners with various corporate setups, check out our article: “How Should I Structure My Business With Multiple Owners?“

2. How Do I Elect S Corporation Status?

To elect S Corporation status you will need to file Form 2553.

• Form 2553 must be filed within two months and 15 days from the date your business starts or if you already have an existing business within two months and 15 days from the beginning of the tax year you wish S Corp election to be effective.  Example: You want S Corp status effective tax year 2021 would need to file Form 2553 by 3/15/2021.
• If you do not file Form 2553 in the required time frame you can request relief for a late election by:
  • 1) Writing on top of Page 1 of Form 2553 “FILED PURSUANT TO REV. PROC. 2013-30”
  • 2) Filling out Section I of Form 2553 for reason of request.
  • Note: The IRS typically accepts late relief in the majority of cases as long #1 and #2 are completed.
  • Example: It is August 2020 and you want S Corp status effective 1/1/20. You can still request relief for a late election and then just get caught up on the payroll since the beginning of the year.

Note: To obtain S Corp tax treatment for state taxes, you may need to file additional documents with your state.

You’ll notice that Form 2553 is a pretty straight forward form to fill out, just ensure you fill it out completely included signatures and information from all owners.

In our next articles we are going to discuss what a “reasonable salary” means and how you can go about setting this up.

If you don’t have a tax advisor (or you need assistance with this election), click here to book your complimentary strategy session with JETRO.