At Wyoming Registered Agents, many of our clients are interested in forming S-Corporations. Few people realize that an LLC can be an S-Corporation, since “S-Corp” is actually a tax designation, not a separate entity type.
Any business can apply to be designated an S-Corp by the IRS as long as it meets the IRS requirements.
Not all businesses are eligible for S-Corp status. To be eligible, you must meet the following IRS requirements:
- Be a domestic company
- Have only allowable shareholders/members
- Have no more than 100 shareholders/members
- Have only one class of stock
- Not be an ineligible corporation (financial institutions, insurance companies, domestic international sales corporations)
What Are Allowable Members?
The IRS sets specific guidelines for who can be a member of an S-Corp. Members must be individuals, certain trusts, or estates. Members cannot be partnerships, corporations or non-resident aliens.
LLC vs S-Corp: What’s the Difference?
A traditional LLC has a very informal business structure. There are no formal management requirements, no Board of Directors, no corporate officers, no SEC filings, no annual meeting requirements.
An S-Corp, on the other hand, must adopt the management structure of a corporation. This means there must be a Board of Directors, as well as corporate officers (President, Vice President, Secretary, Treasurer). Annual shareholder meetings must be held, minutes must be taken, etc. Shareholder reports must be prepared and distributed.
LLC members are not required to take a salary. They may take distributions according to their percentage of ownership.
An S-Corp, however, must pay each member a reasonable salary. “Reasonable” is key. The salary must be equitable to the standard wage for that position in other companies. If it is not, the IRS will audit your company and re-allocate profit distributions as wages and collect the appropriate taxes.
LLCs may distribute profits how the members see fit. While most distributions are in accord with a member’s ownership percentage, the actual distribution can be whatever is agreed upon by the members.
In an S-Corp, distributions must be proportional to the contributions of each member. If Jane and Jill each contribute $10,000 when forming the company, then they must take a 50/50 split of the distributions, regardless of how they want to divide the profits.
LLCs endure as long as the members remain part of the company. Should a member leave, however, the LLC is automatically dissolved (unless otherwise specified in the Operating Agreement).
An S-Corp, on the other hand, has a perpetual existence. Members may come and go, but the S-Corp continues to exist independent of its owners.
Applying for S-Corp Election with the IRS
To apply for an S-Corp election, you must submit Form 2553 to the IRS. You cannot file this online. It must be mailed or faxed.
When to File:
- No more than two months and 15 days after the beginning of the tax year the election is to take effect; OR
- At any time during the tax year preceding the tax year the election is to take effect
Where to File:
There are different filing offices for separate sections of the country. See the chart below to find out where to send your application.
|Your State||IRS Center Address|
|CT, DE, DC, FL, GA, IL, IN, KY, ME, MD, MA, MI, NH, NJ, NY, NC, OH, PA, RI, SC, TN, VT, VA, WV, WI||Dept of the Treasury
Cincinnati, OH 45999
|AL, AK, AZ, AR, CA, CO, HI, ID, IA, KS, LA, MN, MS, MO, MT, NE, NV, NM, ND, OK, OR, SD, TX, UT, WA, WY||Dept of the Treasury
Ogden, UT 84201
After submitting the Form 2553, the IRS will inform you that your application has been either accepted or rejected. Normal processing time is 60 business days.
If your application is accepted, your S-Corp status remains in place until the status is either terminated (by you) or revoked (by the IRS).
Form 2553 Filing Notes
- You cannot file for S-Corp status without an Employer Identification Number. All corporations are legally required to have an EIN.
- The Form 2553 must be signed and dated by an officer/member of your LLC who is authorized to sign the document.
- All members must submit their Social Security Numbers on the application if their consent is required in order to make the election. The issue of who must consent or not should be addressed by your operating agreement.
- Send the application by certified mail. In the event that the form is lost or misfiled, the IRS will accept a certified receipt as proof that the Form 2553 was properly submitted.