Revocation of S Corporation Status
A Subchapter S corporation is a type of business organization structure designed for small to mid-sized businesses. Similar to a standard corporation, the S corporation structure differs in that the business' income and losses pass through to the shareholders' (owners') tax returns instead of being subject to a corporate income tax. The Internal Revenue Service can revoke a business' S corporation status for failing to meet certain criteria.
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Function
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In order to maintain S corporation status, a company must file IRS Form 2553. The owners or directors of an S corporation must turn in this form to the IRS within two months and 15 days of the beginning of the business' taxable year. If the business operators do not file this form within the allotted time, the IRS will revoke S corporation status and convert the company into a standard corporation.
Features
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A business may also lose its S corporation status by failing to meet the requirements set forth by the IRS. S corporations may have a maximum of 100 shareholders, issue only one class of stock and have only United States citizens or permanent residents as owners. Additionally, partnerships and corporations cannot have ownership stakes in S corporations. If an S corporation ceases to meet these criteria, the IRS will convert it into a standard corporation.
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Geography
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In addition to the federal (IRS) requirements, several states also have stipulations for businesses looking to maintain S corporation status. According to "Entrepreneur," these states require businesses to file state S corporation forms every year in order to maintain the status. Additionally, certain states, including New York and New Jersey, do not recognize S corporation status at all, treating such businesses as standard corporations. Moving a business to one of these states will result in revocation of S corporation status.
Voluntary
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Business owners can elect to voluntarily revoke a company's S corporation status. According to an article from Frascona, Joiner, Goodman and Greenstein, a business can revoke its own S corporation status with the consent and blessing of shareholders, holding at least 50 percent of the company's stock. In this case, the business would continue as a standard corporation beginning either retroactively to the current tax year or at the beginning of the next tax year.
Considerations
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Business directors wishing to continue their company under the S corporation status should keep a detailed account of the business' finances, ownership, form filing and taxes. Losing S corporation status will bring a company significant extra costs as it becomes subject to the double taxation of a standard corporation. Additionally, revocation of S corporation status can affect a business for years. A company which loses its status may not reapply for S corporation structure for five years after the revocation.
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