Next, S Corporations have certain restrictions. You must have: 1) Less than 100 shareholders 2) No foreign shareholders (green cards are ok and are considered U.S. shareholders) 3) No shareholders that are corporations and 4) No second class of preferred stock. If you have any of the above, you will not be able to form an S corporation. Consider an LLC any of the above applies to you, particularly if you have shareholders that are foreigners. See the above link on how to form an LLC.
Locate the "S Election" Form 2553 and fill it out within 75 days of incorporating
Next, you will need to file an "S Election" to turn your corporation into an S Corporation by filling out Form 2553 with the Internal Revenue Service. You can find a copy of Form 2553 here:
You should fill out the form and submit it to the IRS within 75 days of forming your corporation because the S election can only be retroactive up to 75 days. In other words, after you file the form, you can make your old corporation an "S Corporation" retroactively by filling out this form within 75 days of incorporation.
Fill in the Address and Incorporation Details
Next fill in the Form 2553 as follows. For Part A, enter the name and address (headquarters) of the corporation, as well as the EIN of the corporation. Enter the date the corporation was formed/incorporated (you will find this on the Secretary of State's certificate they sent you or you can look it up by searching for your business on the Secretary of State's website, usually), along with the state you formed the corporation in.
Election Effective Date -- Choose the Incorporation Date
For Section D, usually you will have not changed the name or address, but if you did, check one of those boxes. For E, enter the date the corporation was formed. This is the retroactive S Election status described in Section 2. You must generally file the form within 75 days (2 months and 15 days) in order for you to put the incorporation month here. Otherwise, if you file it more than 75 days later, subtract 2 months and 15 days from the day you file it and enter that date here.
Tax Year -- Choose Calendar Year
Most Businesses will want to choose the calendar year here because you file your taxes as an individual on a calendar year basis and it makes the most sense. Also, you have to fill out more paperwork (page 3) if you choose anything other than calendar year. Most businesses that are seasonal, like Ski resorts, use fiscal years because their business starts in October and ends in May, so it makes more sense for them to close their books when their business ends in May. However, for most people, calendar year works fine.
For G, S Corporations generally cannot have more than 100 shareholders. If they do, you can elect to treat members of a family as 1 shareholder. For most people, this will not apply to them.
For H, enter the name of the person who the IRS can call if they have a question about the tax returns of the S Corporation.
Use this section if you file the S election more than 75 days after you incorporated and you want to make it retroactive to the time of incorporation (i.e. you were late in filing). This section is the reason that you are filing late. For most people, this will not apply because "I forgot to file it on time" is not a valid reason.
Name and Social Security Numbers of Shareholders
On this page, you need to get the name, address, signature and social security number of all of the shareholders. They all must agree to make it an S Corporation. You will also need their total shares or shares percentage owned, as well as the date they bought the stock. For the "shareholders tax year ends" put 12/31.
Page 3 -- Ignore it
Only fill out this page if you selected anything other than "calendar year" for section F. Unless you need a different tax year, selecting fiscal year or 52-53 week year will just cause you more paperwork on page 3. I recommend skipping it and entering calendar year. Part III only applies if your shareholder is another S Corporation (less than 5% of al cases). You can ignore this part as well.
Fax the Form to the IRS
Finally, fax the form to the IRS. Usually, if your business is headquartered on the east coast, you will use the east coast number of (859) 669-5748. If your business is headquartered on the west coast, use the west cost number of (801) 620-7116. For more information, see the instructions here: http://www.irs.gov/pub/irs-pdf/i2553.pdf
Call or Wait for Mail from The IRS
The IRS will then send you a letter in the mail to the address you entered in the form as to whether or not they approved your S election. However, this can take up to 60 days. You can also call them and find out earlier whether or not your S election has been approved. usually it takes around 1 week for the fax to show up in their system so be patient when calling them.
Congratulations! You just formed an "S Corporation." Now, there is no corporate level tax at the federal level, and you only need to pay personal tax on the profits of the S Corporation. However, remember to keep a separate bank account between you and the S Corporation. You should also file a "1120S" Tax return for informational purposes to the IRS, along with K-1s to the shareholders of the S Corporation during tax time.
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