How to Form an S Corporation

Step 1: Form the Underlying Corporation

S corporation status is a federal tax election, not a separate type of legal entity. Before you can elect it, you need an existing domestic corporation (or an LLC that has elected to be taxed as a corporation), formed by filing Articles of Incorporation with your state's filing agency and completing the usual organizational steps: appointing a registered agent, adopting bylaws, and issuing stock.

Step 2: Get an EIN

Apply for an Employer Identification Number from the IRS once your corporation is approved by the state. The online application is free and usually gives an EIN immediately; you'll need this number on Form 2553, so get it before you prepare the election.

Step 3: Confirm You Meet Eligibility

Before filing, confirm the corporation meets every S corporation eligibility rule: no more than 100 shareholders, each one an individual, certain trust, or estate (not a partnership, corporation, or non-resident alien), only one class of stock, and the corporation must be domestic and not on the IRS's list of ineligible corporation types. See our guide on S corporation eligibility requirements for the full rules.

Step 4: Complete and File Form 2553

Form 2553, Election by a Small Business Corporation, asks for the corporation's name, address, EIN, state and date of incorporation, chosen tax year, and the names and signatures of every shareholder. Per the IRS, the form must be filed no more than two months and fifteen days after the start of the tax year the election should apply to, or at any time during the tax year immediately before it. For a calendar-year corporation, that generally means filing by March 15 for the election to apply to the current year.

Step 5: Get Every Shareholder's Signature

Every person who held stock in the corporation at any point from the beginning of the tax year through the date the election is filed must sign and consent on Form 2553, not just the shareholders as of the filing date. If a shareholder sold their stock partway through the period, their consent is still required.

Step 6: Watch for IRS Confirmation

The IRS generally sends a confirmation notice (CP261) once it accepts an S election, typically within a couple of months of filing, though processing times vary. If you haven't heard back within a reasonable period, you can call the IRS Business and Specialty Tax Line to check the status before you file a return relying on S corporation treatment.

Step 7: Start Running Payroll for Working Owners

Once the election is in effect, any shareholder who works in the business must be paid reasonable W-2 compensation through payroll before taking further profit as a distribution. Set up payroll before the first year the election applies, since running it consistently from the start avoids one of the most commonly scrutinized S corporation compliance issues.

New Corporations Get a Short Window, Not a Long One

A newly formed corporation's two-month-and-fifteen-day window is measured from the date its tax year begins, which is often tied to its incorporation date, not from whenever you get around to filing. Calendar this deadline the moment you incorporate if you know you want S status from day one.

Missing the Deadline Isn't Always Fatal

Under Revenue Procedure 2013-30, a corporation that missed the Form 2553 deadline for reasonable cause can request late election relief, generally available if less than 3 years and 75 days have passed since the intended effective date and the corporation has filed consistent with S corporation treatment since then.

Decide on a Fiscal Year Before You File

Most S corporations use a calendar tax year; choosing a different fiscal year generally requires a separate business-purpose justification to the IRS. Settle this before filing Form 2553, since the election's deadline is measured against your chosen tax year.

This Isn't Tax Advice

Whether S corporation status benefits your specific business depends on your profit level and plans. Talk to a tax professional before forming the underlying corporation or filing Form 2553.