How to Elects S Corporation Status

Qualifications, Process, and Benefits

By Jean Murray

After you have formed your corporation, you can decide to become a Subchapter S Corporation (S corporation). Here is information on this type of corporation and how to complete a Sub-chapter S Election Form.

Subchapter S Corporations

An S corporation is a corporation that elects "small business" status, under Subchapter S of the Internal Revenue Code. S corp status allows the corporation the limited liability benefits of a corporation, but the tax rate of the individual shareholders. (1)

Corporate Shareholders vs. S Corporation Shareholders

The owners of corporations and S corporations are called shareholders.

Shareholders of corporations receive dividends as approved by the corporate board of directors.

S corporation shareholders report their share of income or loss on their personal tax returns. The shareholders are then taxed on this income, along with their other income, at their personal tax rate.

Qualifications to Elect S Corporation Status

The IRS qualifications for S Corporation status are:

  • It must be a domestic (U.S.) corporation, with no foreign investors;

  • It must have no more than 100 shareholders;

  • It has only one class of stock;

  • It must use a December 31 year-end.

Shareholders may be individuals, certain kinds of trusts, and estates, but partnerships, corporations, or non-resident aliens may not be S corporation shareholders. (2)

Filing an S Corporation Election

An S corporation isn't a separate business entity; it's a form of corporate taxation. Here's how it works:

A corporation is set up and doing business.

At some point, the corporation decides to be taxed as an S corporation. This is called an "election."

The process for electing S corporation status begins with an IRS application, on IRS Form 2553. Form 2553- Election by a Small Business Corporation. This form gives the IRS detailed information about the corporation requesting S Corp status and about the corporation's eligibility for electing this status.