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We would help you in filling the Form 2553, and initiate the process of requesting S-corp status to your business.

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S-Corporation Election

It is a sub chapter of election that elects a small business status, which allows the corporation to avail the benefits of limited liability of a corporation. Any corporation which is domestic (U.S.) corporation, with no foreign investors, it should not have more than 100 shareholders, it has only one class of stock and should be using a Decemeber 31 as year end.

The IRS wants that the Sub Chapter of S Election could be filed for not more than two months and 15 days after the tax year to start. It means the first year of the initiation of the business for the starters.


Benefits of S-corporation Election


Limitation of liability:

Owing to its corporation status, an S corp reserves the right to acquire a distinct legal entity and limited liability of owners in case of lawsuits, business debts and company losses

Avoidance of double taxation:

A corporation pays income tax on its profits and then the owners are taxed on their respective dividends, thus creating double taxation. Unlike a corporation, taxes are paid only by the owners in their individual profit sharing ratio, and not by the S Corp itself.

Lower personal income taxes:

Since profits accrued to an S corp profits are taxed to the owners, the resulting taxes may be less than the corporate tax rate. This is because unlike self employment income, profits accrued by an S Corp are not typically considered as compensation and hence are taxed only on federal and state level, and are not subject to self employment taxation.

Frequently Asked Questions

When is the S-Election deadline?

The deadline for getting S-Corp status depends on the time of your business incorporation.

  • For newly formed Corp. or LLC: You need to file for S-Election within 75 days of your business formation. For eg. if you incorporate your business on 21/09/2017, you need to apply for an S-Corp status before 6/12/2017.
  • For existing LLC or Corporations: You need to apply for S Election in the following year. This needs to be done within 75 days from the beginning of the tax year. For instance, if the tax year starts from 1st January to 31st December 2017, you need to file for S-Election before 16/03/2017.
How to qualify for S-Corp status?

To make an election to get S-Corp. Status, the following requirements need to be fulfilled:

  • Must be an eligible business entity -an LLC or a domestic Corporation.
  • Cannot have more than a single class of stock.
  • Must not have more than 100 shareholders.
  • If any family member (from a common ancestor) or spouse (present or former) elects such treatment, they automatically count as a single shareholder.
  • Shareholders must be U.S. citizens or residents and mustn’t be a part of another corporate shareholder or partnership. Certain tax-exempt corporations, primarily corporations with 501(c)3 status, are permitted to be shareholders.
  • All the profits and losses incurred are to be allocated among the shareholders proportionately to each other’s share in the business.
What are the benefits of S-Corporation?

Some major benefits of S-Corp include:

  • All the profits and losses an S-Corp incurs pass through the personal income tax of each member. They are not taxed at the corporate level.
  • S-Corp shareholders do not face self-employment taxation. The savings can be utilized for other purposes.
  • Upon selling of business, the taxable gain of a member is much higher than the time he started.
What primary advantage S-Corp has over C-Corporation?

S-Corp structure is quite similar to C-Corp Structure with a few noteworthy differences. The major advantage S-Corp has over C-Corporation is the pass-through treatment of taxes to the member’s personal income tax. This avoids double taxation of the business income.

Are there any drawbacks of forming an S-Corporation?
  • Ownership restrictions- You can only possess one class of stock. In addition, your corporation cannot have more than 100 shareholders. It is important to note that foreign shareholders, some other trusts or businesses can’t own an S-Corp.
  • Inaccurate characterization of payments- There are many challenges which arrive with the flexibility in the characterization of wages and dividends. Unfair evaluation of wages can lead to higher taxes.
How is an S-Corp managed and taxed?

An S-corporation is primarily managed by three tiers of management:

  • Corporate Officers include the CEOs who execute daily operations of the company.
  • The Board of Directors appoint the officers in the Corporation and make big strategic corporate decisions.
  • The shareholders hold an annual meeting and choose the Board. These shareholders invest in the shares of the company and do not have any role in operations of the company.

S-Corps. don’t have a dual taxation system in comparison to the one a C-Corp. uses. All the profits and losses that an S-Corporation incurs, pass through the personal income tax of its members. Thereupon, the dividends are taxed only once at the shareholder level. Thus, it is key to realize that there is no imposition of taxes at the corporate level.

What is Form 2553?

Form 2553 is the S-Election Form that you need to file with the IRS.

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