S Election also known as a Small Business Election is not valid until approved by the IRS.
Many people believe if they setup a corporation and say it's an S corporation that is all they need. Nothing could be further from the truth. Even the IRS taxpayer identification application asks if you want to be an S corporation but that does not make you an S corporation.
Qualifications for an S corporation
In order to be an S corporation you must (1) All shareholder must consent or agree to be an S corporation. If one person who owns shares does not want to be an S corporation than you can not even apply. (2) All shareholders must be US Citizens or resident aliens. A resident alien is a person who is legally in the United States. They do not need to be in the process of being a citizen but must be here valid. Whether the DREAM Act applies is not yet determined. f you are not a U.S. citizen, you are considered a nonresident of the U.S. for U.S. tax purposes unless you meet one of two tests. You are a resident of the United States for tax purposes if you meet either the green card test or the substantial presence test for the calendar year (January 1 – December 31) (3) There must be less than 100 shareholders, (4) There must be only one class of stock and (5) May not be partnerships, corporations.
You MUST file to become an S corporation within 75 days of formation or the beginning of a new tax year for that new tax Year
In order to qualify you must submit your completed S Election Form 2553 to the IRS within 75 days of filing your articles of incorporation or the beginning of the tax year if applying in a subsequent year. The IRS will review your application and if you meet the qualifications then you are approved. If you do not receive an approval letter from the IRS then you are not an S Corporation. Many people are mistaken. Either they have requested an S corporation status with whomever handled their filing or when obtaining a taxpayer identification number but that does not make your entity an S corporation.
Make Certain you have received an IRS approval letter or follow up
We can not emphasize enough that you must follow up if you do not have an approval letter. Many people never check and file their tax returns as an S corporation. Sometimes years go by before the IRS notifies you that you were not an S corporation and they will send you a BIG bill. The differences between an S corporation and an a C corporation can be huge.
Include a Board Resolution of S Election
There are many reasons you must prepare Board minutes and Shareholder minutes. When preparing these minutes make certain you have a Board resolution that you are electing to be an S corporation. This could be the difference if the S Election is challenged though it is guaranteed.
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