If you run your business as a corporation or a LLC you can choose to become an s corporation. The benefits of becoming an s corporation if you are a corporation, is the elimination of double taxation. As an s corporation you pay taxes on all profits and pay taxes again when you pay dividends.

If you are a LLC taxed as a sole proprietor, the benefit of being taxed as an s corporation is you have more control over how your income is taxed.

How to become an s corporation

To become an s corporation you must

1. Meet s corporation requirements
   
2. File the election
   
3. Meet the election deadline
   
4. Or file for a late election
   

S Corporation requirements

To become an S corporation you must meet the following requirements:

1. No more than 100 shareholders
   
2. One class of stock
   
3. All shareholders must be us citizens
   
4. All shareholders are either individuals, estates, some exempt organizations or some trusts
   

Filing the election

The election is made by filing form 2553, Election by a Small Business Corporation.

Election deadline dates

Election effective current tax year

No later than 2 months and 15 days after the beginning of the tax year in which the election is to take effect. Example Joe Blow forms his LLC January 1, 2014. Joe Blow must elect to become an S Corporation by March 15^th, 2014 to be recognized as an S Corporation in his first taxable year.

Election to take effect in a succeeding year

An election can be made anytime during the year before the year an election is to take effect. For example:

Joe Blow has been in existence for a while and decides he is ready to switch to an s corporation in 2015. Joe Blow can elect by filing form 2553 any time during the 2014 tax year.

Word of caution: although you have ample time to elect S Corporation status in the preceding tax year, you might not want to wait. If the IRS rejects your first application, you won’t have enough time to make corrections before the next tax year.

Late Election

The IRS can show some sympathy for late elections if there is enough cause as to why the tax entity is filing late. However, it is not advisable to depend on the sympathy of the IRS.

Effect of election

Once the S Corporation status has been approved, the old status seizes to exist. The S Corporation must remain so for a period of 60 months after the effective election date. Certain exemptions can be applied for early termination.

For more information access the IRS form 2553 form by clicking here.