Why founders elect S Corporation status
By default, an LLC with one owner is taxed as a sole proprietorship and an LLC with several owners is taxed as a partnership. A corporation is taxed as a C-Corporation unless it elects otherwise. An S Corporation election is a way to change how the IRS taxes the company, without changing what the company is.
The main reason owners make the election is self-employment tax. In a sole proprietorship or partnership, the whole profit is generally subject to self-employment tax. In an S Corporation, an owner who works in the business is paid a reasonable salary that carries payroll tax, and remaining profit can be taken as a distribution that is not subject to self-employment tax. For a profitable business, that difference can be meaningful.
It is not a free lunch. The company must run payroll, file a separate federal return and keep cleaner books. Whether the election pays for itself depends on how much profit the company makes and how much of it must be paid out as salary, which is why we look at your numbers before recommending it.
Who is eligible, and who is not
The IRS sets firm rules for S status, and a company that does not meet them can lose the election, sometimes with retroactive effect. We check each of the following before filing.
- The company is a domestic US corporation, or an LLC that elects to be taxed as a corporation and then as an S Corporation.
- It has no more than 100 shareholders.
- Every shareholder is an individual, an estate, or one of a short list of eligible trusts. Partnerships and corporations cannot own shares.
- Every shareholder is a US citizen or US resident. A non-resident alien cannot be a shareholder.
- It has only one class of stock, meaning all shares carry identical rights to profits and liquidation proceeds.
The non-resident rule matters for many of our clients. If you live outside the US and are not a US tax resident, an S Corporation election is generally not available to you, and filing it would put the company at risk. In that situation we will explain the alternatives rather than file something that fails later.
What Form 2553 is
Form 2553 is the IRS Election by a Small Business Corporation. It names the company, states the tax year and the date the election should take effect, and carries a signed consent from every shareholder. An LLC that has not yet chosen corporate tax treatment is treated as having elected corporate status on the day the S election takes effect, so one form covers both steps.
Mistakes on the form are the most common reason an election is rejected or delayed. A missing shareholder signature, a wrong effective date or an inconsistent tax year can each cause the IRS to send a rejection letter weeks later. We prepare the form from your company records so these details agree with what the IRS already holds, including your EIN and the legal name on your formation documents.
The filing deadline
Timing is the part people get wrong. In general, Form 2553 must be filed no more than two months and 15 days after the beginning of the tax year in which the election is to take effect, or at any time during the tax year before it. For a calendar-year company, that means the filing window for the current year closes in mid-March.
For a newly formed company, the first tax year starts when it has shareholders, acquires assets or begins doing business, whichever happens first. That date can be earlier than the day you registered with the state, which is why a company that formed in January can already be close to its deadline by March.
If the deadline has passed, the IRS has a late-election relief procedure for companies that meet certain conditions, including reasonable cause for the delay and consistent filing as an S Corporation. We review your dates and tell you whether relief is realistic before you spend anything further.
How the BookMyLLC process works
- You send your company details, owner list and ownership percentages through your client dashboard.
- We run the eligibility check and tell you plainly if the election is not available or not advisable.
- We prepare Form 2553 with the effective date that fits your goals and the deadline.
- Each owner reviews and signs the consent. Signing is done electronically.
- We file the form with the IRS and track it. The IRS normally replies with an acceptance letter, often called CP261.
- You receive a copy of the acceptance letter and a short guide on what changes from that day.
The IRS does not charge a fee to file Form 2553, so the fee on this page covers our preparation, review and tracking only.
What changes after the election is accepted
Once accepted, your company files Form 1120-S each year instead of reporting profit on your personal return alone, and it issues a Schedule K-1 to each shareholder. Profit still flows through to the owners, so the company itself generally does not pay federal income tax.
Owners who work in the business must be paid a reasonable salary through payroll, with the usual withholding and filings. The IRS looks for salaries that are in line with what the business would pay someone else to do the same work. Taking only distributions and no salary is a well-known audit trigger.
There are also state-level effects. Most states follow the federal election, but a few tax S Corporations differently or charge a minimum franchise tax. We note the state rules for your company when we review it.
When an S Corp election is not the right move
- Your profit is low. Payroll and an extra return can cost more than the self-employment tax you would save.
- You expect to bring in investors that are companies or non-US persons. They cannot hold S Corporation shares.
- You need different classes of ownership, such as preferred shares or special profit splits.
- You are not a US citizen or resident for tax purposes.
In each of these cases, staying as an LLC taxed as a partnership or sole proprietorship, or choosing C-Corporation status, is often cleaner. Our C-Corp formation service covers that route.
What you get with this service
- A written eligibility check covering owners, share structure and entity type.
- Form 2553 prepared with the correct effective date and tax year.
- Electronic consent from every owner.
- Filing with the IRS and follow-up until the acceptance letter arrives.
- A review of late-election relief if the window has closed.
- A plain-language guide to payroll, distributions and Form 1120-S.
This service covers the election itself. Ongoing payroll, bookkeeping and the annual Form 1120-S can be added through our bookkeeping, payroll and tax preparation services.
Before you order
Have your EIN, the date your company was formed or began business, and the names and ownership percentages of every owner ready. If you are unsure whether an S election suits your company, book a consultation with a CPA first. It costs far less than correcting an election that should not have been filed.
If your company was formed through BookMyLLC, we already hold your formation records and EIN, so the election can usually be prepared without asking you for the same documents twice. If it was formed elsewhere, upload your articles of organisation and EIN confirmation letter and we will work from those.
