S-Corporation
An S-Corporation is not an entity type but a federal tax election made by an eligible LLC or C-Corporation. The election is filed with the IRS using Form 2553. S-Corp taxation passes business income through to shareholders, avoiding the double taxation of C-Corporations.
Definition and overview
An S-Corporation is not an entity type but a federal tax election made by an eligible LLC or C-Corporation. The election is filed with the IRS using Form 2553. S-Corp taxation passes business income through to shareholders, avoiding the double taxation of C-Corporations. The concept is foundational to US business law and tax practice. Most founders encounter s-corporation either at formation, during major business changes, or in connection with compliance filings.
History and legal basis
The S-Corporation election was created by the Subchapter S Revision Act of 1958, codified in IRC Subchapter S, Chapter 1. Originally limited to 35 shareholders, the limit was expanded to 75 in 1996 and to 100 in 2004. The Small Business Job Protection Act of 1996 also allowed certain trusts and tax-exempt organizations to be S-Corp shareholders.
When to use s-corporation
S-Corporation typically applies in these situations:
- At formation. Many of these concepts are decided when the entity is first created.
- During growth stages. As businesses scale, the concept may become more relevant or change in application.
- Tax planning. Most concepts in this area have direct tax implications.
- Liability and asset protection. Many of these structures exist primarily to manage legal and financial risk.
- Investor and M&A activity. Funded startups and acquisition targets need precise compliance with these concepts.
How to set up or file
- Research applicable rules. S-Corporation is governed by a combination of federal (IRS, FinCEN) and state law. Verify current rules.
- Gather required information. Most filings require entity details, identifying information, and supporting documentation.
- Complete the form or filing. Federal filings typically go to IRS, FinCEN, or USPTO. State filings go to the Secretary of State or applicable state agency.
- Pay any applicable fees. Federal fees vary; state fees range from free to several hundred dollars depending on filing type.
- Maintain documentation. Keep filed copies and supporting records for at least 7 years for tax purposes.
- Track ongoing compliance. Many concepts in this area trigger ongoing filing or reporting requirements.
Common mistakes
- Missing deadlines. Federal and state deadlines for filings related to s-corporation are strict. Missing them often results in penalties.
- Incorrect classification. Many concepts have multiple sub-types that affect treatment. Get the classification right at the start.
- Inadequate documentation. When something goes wrong, documentation determines outcomes. Maintain clear records.
- Ignoring state variations. US business law varies significantly state-to-state. What's true in Delaware may differ in California.
- DIY without verification. S-Corporation can be DIYed, but mistakes are expensive. Verify with a professional when uncertain.
Costs and fees
Costs associated with s-corporation vary by type, state, and complexity. File.Business handles most s-corporation services as part of our compliance plans (starting at $99/yr); we pass through state and federal filing fees at cost. Compare specific cost breakdowns across all 51 jurisdictions using our cost-by-state calculators.
Get help with s-corporation
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Start my business Talk to a specialistFAQ
What is an S-corporation?
An S-corporation is not an entity type but a federal tax election, made on IRS Form 2553, that lets an LLC or corporation pass income to owners while paying part of it as distributions that avoid self-employment tax. You pay yourself a reasonable salary and take the rest as distributions. We file the election and coordinate the payroll it requires.
How does S-corp taxation save money?
By splitting your income: instead of all profit being subject to self-employment tax, only your reasonable salary is, while distributions above it are not, which can save meaningfully once profit is high enough to outweigh the added payroll and filing cost. We run your numbers before you elect so the saving is real.
Does my LLC become a corporation if I elect S-corp?
No: a LLC can elect S-corp taxation while staying an LLC, keeping its simpler structure and formalities. You do not convert entity types at the state. S-corp is a tax status layered on top of your existing entity, and we keep your LLC and just change how the IRS taxes it.
What is a reasonable salary?
It is what a comparable business would pay someone to do your job, which the IRS requires you to pay yourself before taking distributions. Set it too low to dodge payroll tax and you invite an audit and reclassification; set it sensibly and the distributions are legitimately tax-advantaged. Getting it right is the core of the election.
When does an S-corp election make sense?
Once profit is high enough that the self-employment tax saved beats the added payroll and second tax return, often in the low-to-mid five figures of profit and up. Below that it just adds administration. We run your actual numbers before you elect rather than assuming it fits.
What is the deadline to elect?
Generally within two months and fifteen days after the start of the tax year you want it to take effect, about mid-March for a calendar-year business, with the same window from formation. Miss it and you usually wait a year, barring late relief. We file inside the window so timing does not cost you.
Can foreign owners have an S-corp?
No: S-corp shareholders must be US citizens or resident aliens, so a nonresident owner disqualifies the election. A C-corporation or a default LLC fits better then, and we flag it before you file rather than after a rejection.
Can I revoke the S-corp election?
Yes: you revoke it with the IRS, usually effective from the start of a tax year, returning to default taxation, with timing rules before you can re-elect. If your profit drops or the admin outweighs the savings, we help you revoke cleanly rather than letting it lapse messily.
Does File.Business handle S-corp elections?
Yes: we prepare and file Form 2553, confirm your state follows the federal election, set up the payroll the S-corp requires, and track the CP261 acknowledgement, so the tax change is done correctly alongside your entity.
How we deliver, end-to-end.
Four-step path from request to confirmation. State and IRS turnaround varies; our steps run in parallel where possible to compress the timeline.
Intake + scope
You tell us what you need through a short intake form (or a call for complex matters). We confirm scope, surface any gating issues (deadlines, missing documents, entity status), and quote any state fees that pass through at cost.
Prepare + verify
Our specialists draft the filing, verify entity details against state databases, run internal QA, and route any items needing your sign-off. You see drafts before anything gets submitted.
File with the authority
We submit directly to the state Secretary of State, FinCEN, IRS, USPTO, or whichever authority your filing requires. We pay state fees at cost and track the submission identifier in your account.
Confirmation + vault
Stamped certificate, IRS notice, or filing receipt arrives in your SOC 2 encrypted document vault the moment we receive it. Next filing deadline auto-added to your compliance calendar where applicable.
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All 51 US jurisdictions
Every state plus DC plus Puerto Rico - direct filings, not third-party reseller. We hold registered-agent qualifications in every state we operate.
Deadline guarantee
If we miss a filing deadline on a service you pay us to manage, we pay the state penalty. Specific to each plan and the filings it includes.
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Change your mind in the first 60 days and we refund our service fee in full. State filing fees pass through at cost and are non-refundable once paid to the state.
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