In terms of business structures, small business owners have a variety of choices, including sole proprietorship, partnership, C corporation, and S corporation. The S company, which provides the advantages of a pass-through organization and limited liability protection, is one of the most well-liked options. However, you must formally opt to become a S corporation with the IRS. This page will cover the procedure of electing to be taxed as a S corporation as well as some associated inquiries concerning it.
You must first create a corporation or LLC in order to choose S corp classification. You must submit Form 2553, Election by a Small Business Corporation, to the IRS as soon as your business organization is established. This form must be submitted no later than two months and fifteen days following the start of your tax year, at any time during the tax year prior to the one in which it will take effect, or both.
Your business’s name, address, and EIN are required on Form 2553, as well as the names and addresses of all shareholders and their corresponding ownership percentages. Depending on your business structure, the board of directors or members must also approve the form and all shareholders must sign it.
Your company will be taxed as a pass-through corporation, which means that the profits and losses are recorded on the individual tax returns of the owners, once the IRS has approved your S corp election. The S corp, on the other hand, is not subject to income tax.
You can be fined if you don’t submit Form 2553 before the deadline. Each shareholder will be assessed a late filing fee of $195 per month for a maximum of 12 months. The IRS may, however, waive the fine if you have good justification for the late filing, such as a medical emergency or natural disaster.
Depending on the time of year and the IRS’s workload, Form 2553 processing times vary. The IRS typically processes your election in 60 days or less. Processing times, however, could be lengthier during the busiest filing season.
Electing S Corp Status as a Single Member LLC A single member LLC must be categorized as a corporation for tax purposes before electing S corp status. Entity Classification Election Form 8832 must be submitted to the IRS in order to accomplish this. The LLC can file Form 2553 to elect S corp status once it has been given the corporation classification. LLC electing S Corporation Status If your LLC has more than one member, you can choose to have a S corporation by going through the same procedure as a corporation. To classify the LLC as a corporation for tax purposes, you must first submit Form 8832. You can then submit Form 2553 to choose S corporation status.
In conclusion, small business owners may profit greatly from choosing to be taxed as a S corp. Nevertheless, it’s crucial to make the election according to the correct dates and processes and to be aware of any processing delays or penalties that may apply. It’s always a good idea to speak with a tax expert or attorney if you’re unclear of the ideal business structure for your purposes.
The answer is no, a person cannot be a S corporation. S corporations must have at least one shareholder and are taxed as pass-through organizations. An S corporation’s shareholders may be individuals, but the S corporation itself cannot be an individual.
The S Corp tax rate for 2021 is an estimate only. S Corporations, on the other hand, are pass-through corporations, which means that the business’s gains and losses are distributed to the owners and recorded on their personal tax returns. An S Corporation’s shareholders are subject to individual income tax rates on their portion of the company’s profits. Individual tax rates vary based on a person’s income and tax bracket.