S Corporation Election

An S corporation election is the choice a corporation, or an LLC eligible to be taxed as one, makes to have its income taxed under Subchapter S of the Internal Revenue Code (sections 1361 through 1379). Filed on Form 2553, the election means the business's profits and losses pass through to the owners' personal returns rather than being taxed at the company level, and an owner who works in the business becomes an employee whose pay splits into wages and distributions. The election is about the tax treatment; it does not change the underlying legal entity, which remains whatever corporation or LLC it was.

The election is governed by timing, eligibility, and reversibility, and each has a rule worth knowing. On timing, Internal Revenue Code section 1362(b) makes an election effective for the current tax year only if it is filed by the 15th day of the third month of that year, which for a calendar-year business is March 15. An election filed after that deadline is generally treated as made for the following year, not the current one, unless the IRS grants late-election relief for reasonable cause. That relief is a request the IRS may grant, most often under Revenue Procedure 2013-30, not an entitlement, so missing the deadline is a real risk rather than a formality.

On eligibility, section 1361(b) restricts S status to a "small business corporation," which must be a domestic entity with no more than 100 shareholders, only one class of stock, and only permitted shareholders, generally individuals, certain trusts, and estates. Nonresident aliens, partnerships, and other corporations cannot be shareholders. A single-member or multi-member LLC can qualify by electing to be treated as an association, and it does so by filing Form 2553 alone; it does not have to file Form 8832 first, because a valid S election is deemed to include the classification election.

On reversibility, the election is a multi-year commitment because getting out is costly. If an S election is revoked or otherwise terminated, section 1362(g) generally bars the business from making a new election until its fifth tax year after the termination, unless the IRS consents to an earlier one. That is why the decision to elect is usually weighed alongside the reasonable compensation the owner will have to pay themselves as wages, a Subchapter S requirement that carries its own payroll-tax consequences and is where the election's real cost and benefit are decided.

Say an LLC's owner decides in late 2026 that she wants Subchapter S taxation starting with the 2027 calendar year, using this timeline as a hypothetical. Because her business uses the calendar year, the election is timely only if Form 2553 is filed by March 15, 2027, the 15th day of the third month. She signs and files the form, with the consent of all shareholders, before that date, and the S election takes effect for 2027.

Had she instead filed on April 1, 2027, the election would generally have applied to 2028 rather than 2027, unless she qualified for and requested late-election relief for reasonable cause. And because a single-member LLC can elect S status by filing Form 2553 by itself, she did not need to file a separate Form 8832 to first be classified as a corporation. From 2027 on, she must pay herself a reasonable wage through payroll, with the remaining profit taken as distributions.

These are the pros and cons of making the election itself; the pros and cons of operating as an S corporation are a separate question.

Pros

• Once effective, profit above a reasonable salary can be taken as distributions that are not subject to self-employment or payroll tax.
• An LLC can elect S status with a single form, without changing its legal structure or first filing Form 8832.
• Late-election relief exists for a business that missed the deadline with a reasonable cause.

Cons

• The deadline is strict: file after the 15th day of the third month and the election usually slips to the next year absent relief.
• Eligibility is restrictive: 100-shareholder cap, one class of stock, and no ineligible owners such as nonresident aliens or corporate shareholders.
• Reversal is expensive: after a termination, no new election for five years without IRS consent.
• The election forces the owner-employee onto payroll at a reasonable salary, with the recordkeeping and payroll-tax filings that requires.