An S corporation election sounds enticing for your business. However, you may find yourself wondering if your business qualifies for an S corp election. So, who can be an S corp? The eligibility for electing S corporation status is defined by the IRS and includes several specific requirements. Here are the key criteria:

Eligible Shareholders

• Shareholders must be individuals, certain trusts, and estates.
• Shareholders cannot be partnerships, S corporations, C corporations, or non-resident shareholders.

Number of Shareholders

• An S corporation must have 100 or fewer shareholders.
• Spouses can be treated as a single shareholder for this count.

Type of Corporation

• An S corporation must be a domestic, U.S. corporation.

Eligible Entity Types

• The S corporation can be a C corporation or a limited liability company (LLC) that has elected to be treated as an S corporation for tax purposes. You cannot initially start your business as an S corp. You first have to incorporate as a C corporation or LLC, and then elect to be taxed as an S Corp.

Single Class of Stock

• An S corporation must have only one class of stock, but differences in voting rights are permitted.

Timely Filing of Form 2553

• The S corporation must file Form 2553, Election by a Small Business Corporation, signed by all the shareholders. This form must be filed:
  • At any time during the tax year before the election is to take effect, or
  • No more than 2 months and 15 days after the beginning of the tax year the election is to take effect. This usually means March 15th if the business began in a prior year. It could also mean 2 months and 15 days after the incorporation of the business. For example, if a business incorporated on June 1st, the shareholders would have until August 15th to make the election for that year.
  • The Form 2553 can still be filed after these dates, however, it must request relief for late elections from the IRS.

Conclusion

Now that we know the technical requirements of who can be an S corp, what does this really mean for your business? It means that most service-based businesses can qualify to be taxed as an S corp. This includes consultants, professional service firms, psychologists, accountants, graphic designers, real estate agents, financial advisors, healthcare professionals, physical trainers, and many many more. 

Feel free to schedule an assessment with a CPA below to see if an S corporation is right for your business!