Do you have a regular for-profit corporation but you want to change it to be an S Corporation? Then, you have come to the right page.
I will attempt to explain all that you need to consider and why when it comes to converting your Corp. into an S Corp. I’ll give you the details, forms and instructions so that you can do it yourself.
But if after, you need help, I’ll give you the option to order the S Election Filing Assistance from SmallBiZ.com.
01 First a few basics
On other pages, we have explained in detail what is an S Corporation and what benefits you may receive by operating your INC as an S Corp. But let’s cover just a couple of basics first. When we are talking about an S Corporation, we are simply referring to how the IRS is going to tax a corporation; we are not talking about how it is filed with the state. In other words, all regular for-profit corporations start their lives as C Corporations. They can at any time after this, “elect” to be taxed as an S Corp. by filing Form 2553 with the IRS. The corporation chooses the effective date of the election (see details below) and then from that effective date forward, the net income (or loss) passes through the corporation to its individual owners for tax purposes.
02 Warning – Danger Will Robinson!
Before you go any further, just one point of warning: Don’t forget that your corporation must formally agree to becoming an S Corporation before it can submit its election to the IRS. Think of your corporation as a child, who is not of age, and cannot send its election form to the IRS without first receiving parental approval. In this case, the “parents” are the Board of Directors, whose actions are entrusted with its officers, and its Shareholders, who elect the Board of Directors.
03 The Formal Process
With every regular for-profit corporation, there is a different formal process to take any major, moderate or small action. Changing the tax status of the entire corporation’s shareholders definitely qualifies as “major” and therefore, must come with the formal blessing of both the Directors and the Shareholders. This means that your corporation must hold two meetings or have unanimous consent and properly document each in the corporation’s corporate records. See Formal Corporation Processes for more information on how to do this exactly.
04 It’s a matter of timing
Filing an S Election must be done in a timely manner. This is because the IRS has set up strict guidelines for when the election can become effective and when you must apply. Essentially, you have 75 days from the election effective date to get your application (or S Election) into the IRS.
05 How to determine the election effective date
The date you enter into the form (see E on Form 2553) is the earliest of one of these three dates:
1. The date your corporation first had shareholders (i.e. formally issued stock certificates to each shareholder); or
2. The date your corporation first had assets (i.e. when did you open the bank account); or
3. The date your corporation first started operations
Under no circumstances can your S Corporation be made effective before your corporation’s formation date. In other words, you cannot form a corporation near the end of the year and then back-date your S Election application to January 1st of that year.
06 What is the S Election Application?
It is the IRS Form 2553. Generally only Page 1 and 2 must be filled out.
07 How do I submit the form?
Carefully! Okay, I’m kidding, somewhat. The best way to file is to transmit by fax to (859) 669-5748. Because you will have a fax confirmation, be sure to print this and clip to your application. That way, if the IRS has never sent you your approval, you have proof that you submitted this properly.
08 Do I have to wait on the IRS?
No, elect and then operate effective the date you set in your application. The IRS will take as little as four weeks, but may never return your approval to you. You may want to set up a tickler for one month to refax the application (write on your coversheet, “2nd Request”) and again retain the fax confirmation. Although you won’t have to, you can do this each month until you receive something from the IRS.
09 What about my state?
With most states, there is nothing you need to do. That’s because most don’t recognize an S Election and/or provide any special state tax benefits. However, some do. Check with your state’s Department of Revenue (or Franchise Tax Department or whatever the corporate taxing agency is in your state) and find out if there is a reduced tax schedule for S Corporations and if so, what do they need after you have received approval from the IRS.
10 Question’s & Answers
Here are some common Q&A’s we we’ve received from customers about their S Corporations.
Q: Can my non-profit corporation elect to be an S Corp?
A: No! Only for-profit corporations are eligible
Q: Can my LLC or another corporation own an S Corp?
A: No! Only permanent US residents can own an S Corporation. So, a corporation with an entity or non-US resident is not eligible.
Q: If I formed my corporation after March 15th, does that mean I cannot elect for that year?
A: No, you can elect for that “short” tax year effective the date you want, as long as that date follows the rules above, and it’s not earlier than 75 days from the date the IRS receives your Form 2553
Q: Once my corporation changes to an S corporation, can I switch back later if I want to?
A: Yes, but it aint easy. Talk to your accountant/CPA about the ins and outs of this.
Q: Can an LLC become an S Corp?
A: See my article on this, How to convert your LLC to an S Corporation?