When forming a corporation in California, you might want to consider becoming an S Corporation. However, there are particular qualifications and steps to become one. In this article, we ask what is an S election? What are the qualifications and what is the S Election Form 2553?
An S Election Must be Approved by the IRS
A Small Business Election, or S Election is not valid until approved by the IRS. Many people believe if they set up 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
To be an S corporation there are five qualifications you must have.
- All shareholders must consent or agree to be an S corporation. If one person who owns shares does not want to be an S corporation, you can’t even apply.
- 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 valid here. Whether the DREAM Act applies is not yet determined. If you are not a US citizen, you are considered a nonresident of the US for US 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 to December 31).
- There must be less than 100 shareholders.
- There must be only one class of stock.
- May not be partnerships or corporations.
If you meet these criteria you might want to become an S Election. The next step is to submit a completed S Election form 2553 to the IRS. 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.
Filing The S Election Form 2553
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 you are approved.
Ensure You Receive an Approval Letter
If you do not receive an approval letter from the IRS, 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.
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 aren't an S corporation and will send you a big bill. The differences between an S corporation and 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.
When you register your business as a corporation, you might wish to apply to become an S corporation. You will need to meet certain requirements and then file an S Election Form correctly. There are many other aspects to consider when forming a business, for example, getting an employer identification number or registering a trademark. Check out Legal Stepz to find out more.