What Does it Mean to S-Corp Elect?

Change a corporation into an S corporation by filing an election form with the Internal Revenue Service.

A regular corporation can choose to operate under Subchapter S of the Internal Revenue Code by filing an election form with the Internal Revenue Service. The resulting "S corporation" enables its stockholders to continue benefiting from corporate limited liability while enjoying the tax benefits of a partnership.

Corporations

An S corporation starts out as a regular corporation. That means it has to be formed and registered with a state by filing articles of incorporation and following any other state laws that pertain to corporations and the authority to conduct business in that state.

Formation

Once a corporation is properly formed and registered, it can choose to make a special tax election under Subchapter S of the Internal Revenue Code, commonly known as "making an s-corp election." Literally, it is the filing of IRS Form 2553: Election by a Small Business Corporation.

Tax Benefit

Electing to be treated as an S corporation affords the corporation special tax treatment by the IRS. It allows shareholders to avoid double taxation by passing corporate income through to the shareholders personally. The corporation no longer has to file an income tax return. Instead, profits and losses are distributed proportionally to the shareholders who then carry the amounts over to their personal income tax returns.

References

• The Free Online Law Dictionary: S Corporation
• FindLaw: S Corporation Facts
• S-Corporation
• Internal Revenue Service: S Corporations
• IRS Form 2553: Election by a Small Business Corporation

Resources

• SCORE: Business Toolbox
• U.S. Small Business Administration: Small Business Planner
• ABA Legal Guide: Forming and Operating a Small Business