Business owners often wonder which business entity makes the most sense for their situation. An S Corporation is a popular choice because it offers both personal liability protection and certain tax benefits. This article covers the basics of becoming an S Corporation, including the election process for business tax and accounting purposes.

How to Become an S Corporation

Two business entities can elect to file business taxes as an S Corporation: Inc and LLC. The election process is the same for both. The business must complete IRS Form 2553 (Election by a Small Business Corporation) within a certain timeframe.

• For current businesses: no more than two months and 15 days after the beginning of the tax year when the election goes into effect.
• For new LLCs and C Corporations: two months and 15 days from the date of formation to choose the S Corporation election status.

If you miss the deadline, you will follow these tax guidelines for the current tax year:

• Corporations are taxed as C Corporations.
• Single-member LLCs are taxed as sole proprietorships.
• Multi-member LLCs are taxed as partnerships.

If you are unable to file Form 2553 within the timeframe listed above, you can always request a late-election from the IRS.

S Corporation Business Operations

S Corporations operate a little differently from other business entities. Here are the key differences to consider.

How to Pay Yourself as an S Corp Owner

Because one of the benefits of an S Corporation is the lack of double taxation, it’s important that owners pay themselves correctly. Otherwise, you may trigger a red flag with the IRS and face an audit.

Any S Corporation owner who is active must pay a reasonable salary to themselves. All employee-owners must take a reasonable salary via W-2. The S Corporation’s remaining profits are then taxed on your 1040. So the delta of tax savings is the payroll tax not paid on the owner-draw portion not being paid as a reasonable W2 salary to the owners.

Ongoing Compliance Requirements for S Corporations

The ongoing compliance requirements vary from state to state, but here are the basics:

LLC Requirements

• Initial Filing: File articles of organization to form an LLC. Pay filing fees.
• Initial Report: Some states require a statement of information with the initial filing.
• Publication Fees: Some states charge a publication fee.
• Annual Report: Most states require an annual report to maintain LLC status.
• Maintaining a Registered Agent: An LLC is required to record a Registered Agent with each state in which they do business. This person (or entity) is notified in the event of a lawsuit.

C Corporation Requirements

• Initial Filing: File articles of organization to form a C Corporation. Pay filing fees.
• Initial Report: Some states require an initial report.
• Publication Fees: Some states charge a publication fee.
• Annual Report: Most states require an annual report.
• Annual Meetings: C Corporations are required to hold annual meetings.
• Meeting Minutes: A written record of meetings is required.
• Maintaining a Registered Agent: A C Corporation is required to record a Registered Agent with each state in which they do business.

Both LLCs and C Corporations may elect S Corporation status if they meet IRS requirements. However, the process can be complicated.

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