Before you apply for an S-Corp tax election, learn if you qualify by reviewing the IRS guidelines below. Electing S-Corp taxation avoids corporate double taxation and saves on self-employment taxes. The IRS imposes strict guidelines on which businesses qualify.
Does your company qualify?
In general, any corporation or LLC that meets the below requirements may apply. LLCs should simply
interpret the rules for a “shareholder” as for a “member”.
- Shareholders may only be individuals, certain trusts, estates, and certain exempt organizations (such as a 501(c)(3) nonprofit). Shareholders may not be partnerships or corporations.
- Shareholders must be US citizens or residents.
- The business may have no more than 100 shareholders.
- The business may only have one class of stock (if stock is issued).
- The business profits and losses may only be allocated in proportion to each owner’s interest in the business.
- The business must not be an “ineligible corporation” such as an insurance company subject to subchapter L, domestic international sales corporation (DISC), or possession corporation under section 585.
- All shareholders must consent to the election.
For more detailed information about rules and exceptions for qualifying, see 26 USC - IRC §1361
Updating Your Operating Agreement
Because typical LLC operating agreements are written for taxation as a partnership, many of these standard provisions must be re-written or removed if the entity is to be taxed as an S corporation. You should have your operating agreement reviewed and modified BEFORE making the election with the IRS.