There are different terms for S Corporation, it could be coined as Subchapter S Corporation or called sometimes as Small Business Corporation. Actually, this is a special tax designation that is granted by the IRS and it lets the corporation to pass on their corporate income, deductions as well as credits to the shareholders. In general, S corporations are not paying income taxes rather, the individual shareholders of the company is splitting up the income or the losses among each other. Once everything is set and done, they report it to their personal tax returns.
With the status of S corporation, it lets the business to steer clear of double taxation which is what happens when a business is taxed both at individual and corporate level. Also take into consideration that “S Corporation” is tax designation and not a type of business entity. It is nearly impossible to integrate S corporation since in order to be one, you need to apply to IRS personally. The question now is, how they could apply to be an S Corporation? In the next lines, you are going to find out the steps on how your business can be one.
Step number 1. Become an LLC or C Corp – the major requirement of a business to attain S Corp status is to be structured as C Corp which is basically a regular corporation. If you will compare it to S Corp status, integrating as a C Corp is something that has to go through the state.
In fact, you might opt for S Corp tax filing status in case that you’re an LLC already and if you have satisfied the criteria prepared by the IRS for S Corp status.
Step number 2. See to it that you have qualified for S Corp status – you need to know that not all C Corp could successfully become an S Corp. In order to successfully apply for S Corp status, the company should be able to meet a number of requirements like for example, be a domestic corporation, it should only have allowable shareholders, it can’t have 100 shareholders or more in total, it can have a class of stock, it couldn’t be an insurance provider, domestic international sales corporation or bank and all the shareholders of the company should unanimously consent to S Corp status.
Step number 3. File a 2553 form – as soon as you have guaranteed that your business was able to meet all the requirements of the IRS, you should then submit a 2553 form which is also signed by the shareholders of the company.