WHAT IS AN S CORPORATION?

S corporations (also referred to as “S Corps”) are corporations or limited liability companies (“LLCs”) whose founders have filed Form 2553 with the IRS, electing to have the company taxed as a “small business corporation” under the federal tax code. There is no such thing as incorporating an S Corp. Rather, founders first must file Articles of Incorporation to incorporate a corporation or must file Articles of Organization to form an LLC. Once those filings have been confirmed by the Oregon Secretary of State’s office, then the company exists and the founders may thereafter file Form 2553 within the appropriate deadlines to have the company treated by the IRS as an S Corp. The company will not be treated as an S Corp until the IRS returns to the founders an S Corporation acceptance letter.

When Must Form 2553 Be Filed?

If the founders want to have the company taxed as an S Corp from the outset, then Form 2553 must be filed within two months and 15 days (i.e., approximately 75 days) from the company’s incorporation date — this is the date that the Oregon Secretary of State files the Articles of Incorporation, if a corporation is being created, or files the Articles of Organization, if an LLC is being formed.

If the founders do not want to have the company taxed as an S Corp immediately, but do want to have the company begin to be taxed as an S Corp at a later date, then the founders may still file Form 2553 within two months and 15 days after the beginning of the tax year the election is to take effect, or at any time during the tax year preceding the tax year it is to take effect.

Most new small businesses simply use the calendar year as their tax year. As a result, the company’s tax year starts on January 1. Other companies start the tax year on a different day. It’s completely up to the founders when to start the company’s tax year, but that date is important since it will mark the beginning of when the S Corp election period starts to run.

As an example, a single founder starts an Oregon LLC on June 1, 2014 and the company uses the calendar year as its tax year. The founder fails to file Form 2553 within two months and 15 days from June 1. As a result, the company cannot be taxed as an S Corp back to the date of its incorporation. However, any time prior to two months and 15 days into 2015 the founder can still file Form 2553 to elect to have the company taxed as an S Corp from January 1, 2015 thereafter.

If the Form 2553 filing deadline is missed, the IRS will sometimes make exceptions for late filings, but there is no guarantee that the IRS will do so.

What Are the Advantages of an S Corp?

So why would a founder go through all of the trouble of electing S Corp tax status anyway? S Corporations have certain advantages over companies treated as disregarded entities (i.e., LLCs with single founders) or companies that are being taxed as C Corporations or partnerships. Those advantages include pass-through taxation at the corporate level, which means that the company’s income and losses pass through to the company’s owners, and the company itself does not incur income tax; founders can often avoid paying excessive employment taxes that they may otherwise incur; and S Corporation tax law is simpler than partnership tax law.

Ultimately, the decision on whether to elect S Corp tax status will depend upon many other factors as well, and should be made only after getting the proper advice from a corporate lawyer as well as from a business CPA or tax lawyer.

Who May Own An S Corp?

The IRS will only accept Form 2553 and approve a company as an S Corp if certain strict requirements are met. Those requirements also must be adhered to after receipt of the S Corporation acceptance letter. Those requirements include the following:

– S corporations must be domestic companies (i.e., they must be incorporated in the United States);

– Only individuals (none of whom are non-resident aliens), estates, certain trusts or certain exempt organizations may be shareholders;

– It must have no more than 100 shareholders;

– It must have only one class of stock; and

– It must not be a so-called “ineligible corporation.”

To read more about what an ineligible corporation is, and other specifics about this list of who may own an S Corp, please check out our S Corporation Election Requirements guide on our firm’s main site.