“S” Corporation Election & Double Taxation Relief
The “S” in S-Corporation signifies your corporation's particular tax designation. Electing to designate your corporation as an S-corporation allows the shareholders to claim profits and losses directly on their taxes and avoid the double taxation of a C corporation. In other words, the designation means the corporation will “pass through” its taxes to it's shareholders in proportion with their ownership interests.
While electing to be an S corporation does have legal implications, such as having no more than seventy five shareholders, the designation primarily concerns pass through tax issues.
For your business to become an S corporation, you must file an election with the IRS. Usually no documents need to be filed with any other state entity, such as the secretary of state, it's just the IRS you deal with in making the election.
The filing you make with the IRS is made with form “2553 – Election by a Small Business Corporation.”
To complete form 2553, you will need to supply the following information:
1. The name and address of the corporation
2. The date the corporation first had shareholders or began doing business
3. The name, address and social security number of EACH shareholder
4. The tax year to be covered by the election,
5. The signature of EACH shareholder.
Obviously the more shareholders your have the more complex the task becomes. Getting everyone to sign off on the document can take time and time is not on your side. The IRS have strict deadlines on the filing of “S” elections. The election must be filed before the 15th day of the third month of the tax year for which you are electing the status.
Put simply, you should file the election within 75 days of the incorporation of your business. From a practical point of view, it therefore makes sense to get the election signed and filed at the same time as you start incorporating your business. It is also recommended, because of the strict deadlines, to file the election through registered mail so you have proof if the IRS claims a late filing.
To read more about the advantages of a s corporation click here.