It’s been about a month since you submitted your incorporation papers and today you received your official number and approval. Congratulations! You are now a CEO and a Chairman of the Board!
If you’ve decided to be an S-Corp then one of your first orders of business should be to fill out the application and mail it in to the IRS. Wait – didn’t you just do that? No – remember when you incorporate you do that at the state level and it automatically forms a C-Corp.
What is an S-Corp? The “S” election is a taxable status change to your C-Corp (also available for LLCs and trusts) that allows you to pass the profits through to the shareholders (you) directly. See my previous post, The Liability Tax Test: Choosing Your Business Structure, to read up on that if you’re not sure which structure you want.
Here’s the good news: electing to become an S-Corp will only take about 10 minutes and is absolutely free. Don’t bother paying a service to do it for you – it’s simple. Just follow the steps below.
Restrictions
Before we begin let’s take another look at the restrictions on C-Corps that want to convert to S-Corps so you can be sure you qualify. This is straight from the IRS web site:
- Be a domestic corporation
- Have only allowable shareholders
- May be individuals, certain trusts, and estates and
- May not be partnerships, corporations or non-resident alien shareholders
- Have no more than 100 shareholders
- Have only one class of stock
- Not be an ineligible corporation (i.e. certain financial institutions, insurance companies, and domestic international sales corporations).
As a new small business C-Corp you most likely qualify and all you really need to do is download and fill out Form 2553. The instructions are even linked as well.
Prerequisites. The EIN.
Notice however that when you take a look at the form you’ll see at the top right there is a field labeled “A” for your Employer Identification Number (EIN).
Ug. One more thing to do.
What’s an EIN and why do we need it? The EIN is the number the IRS uses to identify you as an employer and to track your payroll contributions. Do you have to do payroll? In most cases yes. Check out this snippet of my previous article for details.
So how do you get an EIN? That’s actually fairly easy, free and also only takes about 10 minutes. And coincidentally, or not, I’ve written an entire tutorial on it. If you need one, and you probably do, go ahead and get that done and then continue on below with the S-Corp election.
The Form – Part I
At first glance the 2553 can look pretty daunting. At 4 pages long and a lot of small print you’re probably thinking there’s no way you can fill this out in 10 minutes, but if you’re a typical small business and you’ve followed my advice and selected a calendar fiscal year, then you only have to read the first 2 pages. Congratulations! You’ve just cut your work in half.
Page 1 – Election Information
Most of Part I is fairly self-explanatory. You’ll want to use the same address that’s on your incorporation documents and the date of incorporation is the date it was officially filed in the state (usually a stamp on your returned paperwork). It’s a good thing you got your EIN also since you’ll need it for section A.
While you don’t have to put everything in uppercase it does remove spelling ambiguities like an upper case “I” (i) and the lower case “l” (L). I think it’s best to be sure they spell your company correctly even if it looks like you’re yelling.
Section D only needs to be checked if you’ve changed your company name or address.
Section E is a little bit tricky: it’s either the date of incorporation or the first day of your fiscal year, whatever that is. If you’ve elected to have a fiscal calendar year (January-December) as I recommend then Section E is one of two dates:
- If you are electing to be an S-Corp in your first year of business then put your date of incorporation here.
- If you are electing to be an S-Corp after your first year of business then put January 1 of the current/future year here.
You only have 2 months and 15 days from the beginning of your calendar year to apply for the S-Corp election for your current year.
*IMPORTANT* You only have 2 months and 15 days from the beginning of your calendar year to apply for the S-Corp election for your current year. If you have a standard calendar fiscal year (beginning on January 1) that means you have until March 15 to apply for the S election. Note that if it’s your first year in business and you incorporated on 7/15 like my example above you would have until 9/30 to apply.
Section F is where you state your calendar year. See the fine print under the selections that says, “If box (2) or (4) is checked, complete Part II”? Part II is all about non-calendar fiscal years and comprises page 3 of the form, which you can comfortably skip as long as you have a fiscal calendar year.
Section G is only relevant if you have more than 100 shareholders listed, which you shouldn’t if you’re a small company and applying for the S election.
Section H is you. I like to use the “Chief Executive Officer” title as it’s typically the highest position in a corporation.
Section I only needs to be filled out if you’re late to file this form. Remember a few paragraphs up I told you about the 2 month and 15 day deadline to file? The IRS is fairly lenient on this deadline from what I’ve heard and if you have a good enough reason in Section I may grant your S election even if you’re late. Don’t blame me if they don’t though. Just get it done on time. You are a CEO now so you’d better get organized!
Page 2 – Shareholder Information
Okay I lied about one small thing. You DO have to fill out some information on all pages – at the top of pages 2-4 there are boxes for your Name and EIN. Use your legal company name for name, not your personal name.
Page 2 is a continuation of Part I and is where you declare the shareholders of your company.
As a small company it’s probably just you, or you and your spouse, or you and your business partner(s). It’s pretty easy – just type out your name and address in column J, sign and date in column K, number of shares in column L, your social security number in column M and 12/31 in column N.
For the number of shares you can use either the actual number or a percentage. I like to incorporate with 100 shares since it keeps the math simple and in the example above I own all of them. The date acquired is the date of incorporation again.
For column N it’s always 12/31 for individuals as far as I know. I suppose it’s technically possible (or it used to be?) for an individual to have a non-calendar fiscal year but that’s probably not you.
The Form – The Rest of It
Page 3 is Part II of the form and can be ignored if you have a calendar fiscal year. Let’s just skip that.
Page 4 has Parts III and IV which cover Trusts and provide some information in case you’re late to file and I’m not going to cover either of them either since you won’t need them. You’re not late, right?
Proofread and Mail
Remember your company name and EIN at the top of all 4 pages and to sign and date the bottom of page 1. The instruction sheet lists addresses where you’ll need to mail it in and it groups states into 2-3 addresses as of this writing. Make sure you mail it to the correct location for corporations in your state.
After you mail it will take around 6-8 weeks to get a response back. The response will either deny your request (rare) with an explanation or approve it and provide you with the date your S election will take effect. In most cases that will be the start of the fiscal year for which you’ve applied. If you’ve applied to start for a future year make sure you file the correct tax documents for your current tax status (C-Corp) for your current year and only switch to the S-Corp paperwork once it takes effect.
Not so bad eh? 10 minutes or less. I knew you could do it.