When you’re starting a business, you’re faced with an almost endless list of decisions. Some of these decisions are exciting, like a name for your business and choosing a location. Other decisions aren’t as exciting but are vital to your business, like deciding how to incorporate. Some businesses choose to incorporate as an S corporation, which requires you to fill out Form 2553 with the IRS.
Understanding S Corporations
Most businesses in the United States incorporate as a C corporation. A C corporation must file a corporate income tax return, and their shareholders can be taxed on the dividends as well. This is sometimes referred to as “double taxation.”
Some businesses may choose to incorporate as an S corporation. With an S corporation, the business’s income and losses are taxed at the shareholder level instead of at the corporate level. There are several requirements to meet to do an S corporation election. These requirements include not having more than 100 shareholders, only offering one class of stock and only having U.S. residents and resident aliens as shareholders.
When to File IRS Form 2553
To officially become an S corporation, you need to fill out IRS Form 2553 on time. You can file the form up to two months and 15 days after the beginning of the tax year in which you want to incorporate. You can also file the form at any time in the tax year before the one in which you want to incorporate as an S corporation if you’ve filed business taxes before.
For example, if you have a new business and you’re incorporating as an S corporation starting January 7, 2019, you can file Form 2553 between January 7 and March 21, 2019. If you had a business that was incorporated as a C corporation in 2018 and you’re changing to an S corporation starting in 2019, you can file Form 2553 at any time in 2018 or within the first two months and 15 days of 2019.
How to Fill Out Form 2553
To ensure your form is accepted by the IRS, it’s important to follow Form 2553 instructions carefully. To start, you need to fill in your corporation’s legal name and its address. Next, you need to fill in your employer identification number. If you don’t have one, you can obtain one through the IRS website or by faxing or mailing them Form SS-4.
You will also need to choose an effective date of your S corporation election. For most businesses, this is the first day of your tax year. You will need to check the box on the form that corresponds with your selected tax year, and then the form will need to be signed by your company president, vice president, chief accounting officer, treasurer and assistant treasurer.
You also need to provide the name and address of each shareholder, as they need to consent to the election. Each shareholder can consent by signing and dating column K on the form or by completing a separate consent form. If you use separate consent forms, they need to be attached to Form 2553 when you submit it to the IRS. You also need to provide the number of shares each shareholder owns and each shareholder's Social Security number.
- A Subchapter S election avoids the double taxation of corporations, where income is taxed first on a corporate level and then on an individual level, when dividends are paid to the shareholder owners.
Melinda Hill Sineriz is a freelance writer with over a decade of experience. She specializes in business, personal finance, and career content. She has worked in sales and has managed her own business for more than a decade. She has also written content for businesses in various industries, including restaurants, law firms, dental offices, and e-commerce companies. Learn more about her and her work at thatmelinda.com.