Form 2553 is a form that companies must file with the IRS in order to elect to be taxed as an S corporation. Note, though, that it's uncommon for startups to make this election. Startups will instead typically be taxed as a C corporation.
For companies that do decide to make the S election, the purpose is usually to shield some of the company's profits from FICA taxes, like social security and medicare. To do this, the company will need to file Form 2553 with the IRS. Both corporations and LLCs can file Form 2553 to make the S election, provided they meet the eligibility requirements, which include the following:
- The company must be a domestic entity.
- It must only have permitted shareholders (e.g., individuals, certain trusts, and estates).
- It must have no more than 100 shareholders.
- It must have only one class of stock.
- It must not be an ineligible corporation (e.g., insurance companies, certain financial institutions).
There are also timing requirements for filing Form 2553. Generally, it must be filed no more than two months and 15 days after the beginning of the tax years when the S election is to take effect. Also, for a newly formed entity, the S election can be made within the first two months and 15 days following the formation of the company.
Once the IRS receives and processes Form 2553, it will send the company a determination letter stating whether the S election has been accepted.
- Corporate Governance
If you’re looking for a tax-related conversation piece for your next cocktail hour, look no further than this entry on the benefits of electing S corporation tax treatment.