How Do I Become an S Corp?

Introduction

If you're a small business owner looking to reduce your tax burden, you've probably heard about S Corporation status. But here's what many business owners don't realize: you can't just start as an S Corp. There's a specific process, critical deadlines, and important requirements you need to understand before making this election.

In this guide, we'll walk through exactly how to become an S Corp, what forms you need to file, when to file them, and what happens after you submit your election.

Understanding the Foundation: You Need an Entity First

Here's the most important thing to understand right from the start: S Corporation is a tax classification, not a business entity type.

You cannot simply "form" an S Corporation. Instead, you need to:

1. First, create a business entity (typically an LLC)

2. Then, elect S Corporation tax treatment by filing Form 2553 with the IRS

Why Most People Start with an LLC

The vast majority of small business owners who become S Corps start with an LLC for several good reasons:

• Simpler formation process - LLCs are easier and cheaper to set up than corporations

• Less administrative burden - Fewer ongoing compliance requirements before making the S Corp election

• Flexibility - You can operate as an LLC while you evaluate whether S Corp status makes sense

• State-level simplicity - Most states have more straightforward LLC requirements

  
  

While you can also elect S Corp status for a C Corporation, most small businesses find the LLC-to-S-Corp path more practical.

The Critical Form: IRS Form 2553

Once you have your LLC (or corporation) established, becoming an S Corp requires filing Form 2553: Election by a Small Business Corporation.

What Form 2553 Actually Does

This form tells the IRS: "I want my LLC/corporation to be taxed as an S Corporation starting on [specific date]."

The form requires:

• Your business name, address, and EIN (Employer Identification Number)

• The date you want S Corp status to begin

• Information about your tax year

• Details about your business structure

• Signatures from ALL shareholders consenting to the election

  
  

Who Must Sign Form 2553

This is critical: every single shareholder must sign the form. If you're a solo owner, that's just you. But if you have multiple owners, everyone needs to sign and consent to the S Corp election. Missing even one signature can cause your election to be rejected.

Timing Is Everything: The 2-Month-and-15-Day Rule

The IRS has very specific deadlines for S Corp elections, and missing these deadlines can cost you a full year of potential tax savings.

The Standard Deadline

To elect S Corp status for the current tax year, you must file Form 2553: No later than 2 months and 15 days after the beginning of the tax year. For most businesses operating on a calendar year, this means:

• Tax year begins: January 1

• Deadline to file Form 2553: March 15

If you miss this deadline, your S Corp election typically won't take effect until the following tax year.

New Business Exception

If you're forming a brand new LLC, you have more flexibility. You can file Form 2553: within 2 months and 15 days from the date of business formation. This gives new businesses a bit more breathing room, but it's still a tight window.

What If You Miss the Deadline?

Missing the March 15 deadline doesn't mean all hope is lost, but it does mean:

1. Your election will be effective January 1 of the following year (most common scenario)

2. You might qualify for late election relief under certain circumstances (requires additional documentation explaining reasonable cause)

The bottom line: Don't miss the deadline. Mark it on your calendar as soon as you form your LLC.

How to File Form 2553: Your Options

You have several ways to submit your S Corp election:

1. Mail (Most Common)

   1. Mail your completed Form 2553 to the appropriate IRS address based on your state. The IRS website lists the correct mailing address for your location.

   2. Pro tip: Send it via certified mail with return receipt requested. This gives you proof of when the IRS received your election.

2. Fax

   1. You can fax Form 2553 to the IRS. The fax number depends on your state location. Like with mail, keep proof that the fax was successfully sent and received.

3. With Your Tax Return (Limited Situations, Not Recommended)

   1. In some cases, you may be able to include Form 2553 with your tax return, but this is not the standard procedure and shouldn't be relied upon for timely filing.

What Happens After You File

After submitting Form 2553, here's what you can expect:

The Waiting Period

The IRS typically takes 60 days (or more) to process S Corp elections. During this time, they're reviewing your form to ensure:

• All required information is included

• All shareholders have signed

• Your business qualifies for S Corp status

• The timing of your election is correct

You'll Receive a Response

Eventually, you'll receive one of two responses from the IRS:

1. Approval Letter (CP261) - This is what you want to see. In this letter the IRS will confirm the following details:

   • Your S Corp election has been approved

   • The effective date of your S Corp status

   • Your business's official S Corporation status

   • Keep this letter in a safe place - you may need it for state tax purposes, banks, or future reference.

2. Rejection or Request for More Information

   1. If something was wrong with your Form 2553, the IRS will either:

      • Reject the election outright (with explanation of why)

      • Request additional information or corrections

   2. Common reasons for rejection include:

      • Missing shareholder signatures

      • Filing after the deadline without proper late election relief request

      • Business doesn't qualify for S Corp status (too many shareholders, wrong types of shareholders, etc.)

      • Incomplete information on the form

What If You Don't Hear Back?

If 60 days have passed and you haven't received anything from the IRS:

1. Don't assume it's approved - the IRS could still be processing

2. Call the IRS Business & Specialty Tax Line at 800-829-4933

3. Have your EIN and filing date ready when you call

4. Follow up in writing if needed, referencing when you filed

State-Level Requirements: Don't Forget!

Unfortunately, electing S Corp status with the IRS doesn't automatically change anything at the state level.

Separate State Filings May Be Required

Depending on your state, you may need to:

• File a separate state S Corp election form

• Pay a state filing fee

• Meet state-specific deadlines (which may be different from federal deadlines)

• Submit proof of your federal S Corp election

Not All States Recognize S Corps the Same Way

A few states (like New York City, Tennessee, and New Hampshire) don't recognize S Corp status at all or have special tax treatments for S Corps. You'll need to research your specific state's requirements.

Before You File: Make Sure S Corp Status Makes Sense

Just because you can elect S Corp status doesn't mean you should. Before filing Form 2553, make sure:

1. You'll Actually Save Money - S Corp status typically makes sense when:

   • Your net business income is at least $60,000-$80,000+ annually

   • The tax savings from reduced self-employment tax outweigh the added costs

   • You have consistent, predictable income

   • Use our [S Corp tax savings calculator] to run the numbers for your specific situation.

2. You're Ready for the Requirements - S Corps come with additional responsibilities:

   • Mandatory payroll - you must pay yourself a reasonable salary. Use our [S Corp Salary Optimizer] to learn more

   • Payroll tax filings - quarterly 941 forms, annual W-2s, and W-3s

   • Separate tax return - Form 1120-S instead of Schedule C

   • More complex recordkeeping - maintaining corporate formalities

3. You Qualify for S Corp Status - Not every business can be an S Corp. You must meet all these requirements:

   • Be a domestic (U.S.) business

   • Have no more than 100 shareholders

   • Have only allowable shareholders (individuals, certain trusts and estates - no partnerships or corporations)

   • Have only one class of stock

   • Not be an ineligible corporation type (like certain financial institutions or insurance companies)

Your Action Plan: Steps to Becoming an S Corp

Ready to move forward? Here's your step-by-step checklist:

Step 1: Form Your LLC (If You Haven't Already)

• File Articles of Organization with your state

• Obtain your EIN from the IRS

• Create an Operating Agreement

Step 2: Run the Numbers

• Calculate your potential tax savings

• Factor in additional costs (payroll processing, accounting fees, etc.)

• Confirm S Corp status makes financial sense

Step 3: Prepare Form 2553

• Download the current version from IRS.gov

• Complete all required sections accurately

• Gather signatures from all shareholders

• Double-check everything before submitting

Step 4: File Before the Deadline

• Submit no later than 2 months and 15 days after the start of your tax year

• Keep copies of everything you submit

• Send via certified mail or fax with confirmation

Step 5: Follow Up

• Wait for IRS confirmation (typically 60+ days)

• Call the IRS if you don't receive a response within 90 days

• File any required state-level forms

Step 6: Implement S Corp Requirements

• Set up payroll processing

• Establish your reasonable salary

• Update your accounting systems

• Inform your tax preparer of the change

Key Takeaways

Becoming an S Corp isn't complicated, but it requires attention to detail and meeting specific deadlines. Here's what you need to remember:

• You must have an LLC or corporation first - you can't just "form" an S Corp

• File Form 2553 with signatures from all shareholders

• File by March 15 for current-year effectiveness (or within 2 months 15 days of starting a new business)

• Wait 60+ days for IRS response

• Check your state's separate requirements

• Make sure the tax savings justify the additional complexity

When done correctly and at the right time, electing S Corp status can save you thousands in self-employment taxes every year. Just make sure you understand the process, meet the deadlines, and are prepared for the ongoing requirements that come with S Corporation status.

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Legal Disclaimer: The information provided in this article is for educational purposes only and should not be construed as tax, legal, or financial advice. Tax situations are highly individual and complex. Always consult with a qualified tax professional, CPA, or attorney before making any decisions regarding S-Corporation elections, entity structure changes, or tax planning strategies. Calculator results are estimates only and may not account for all relevant tax provisions or your specific circumstances. SCorpGuide.com and Forever Exploring LLC are not liable for any decisions made based on information provided on this site. For complete terms, see our Terms and Disclaimers.