Nuts and Bolts of the S Corp Election
By Jason Watson, CPA
Posted Tuesday, October 5, 2021
Completing Form 2553 for the S corporation election is straightforward. The form asks for basic business information such as name, EIN, date of incorporation and date of election. Keep in mind that this form was built for a C Corp electing to be taxed as an S Corp, so some of the form boxes use words like “incorporation.” LLCs are not incorporated; rather they are usually formed or organized depending on your state’s nomenclature.
It also requires signatures from all owners. Again, the form references shareholders, but an LLC has members. Don’t get too hung up on this, but please understand some of the subtleties. For sanity, members = shareholders = owners.
If your LLC has an existing Operating Agreement it might need to be amended or restated so it aligns with your entity being taxed as an S corporation. We can help guide you on this.
If you are using a corporation (C Corp or Professional Corp), a corporate resolution might need to be drafted and signed allowing for this tax election. However, Form 2553 references this implicitly within the signature blocks of each shareholder.
Five states require a separate S corporation election form to be filed- Arkansas (really?!), New York, New Jersey, Ohio and sometimes Wisconsin. Generally nothing needs to be done with your state’s Secretary of State in terms of notification or housekeeping stuff.
If you live in a community property state such as Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin your spouse might need to sign the Form 2553 even if he or she is not an owner.
Side bar: Community property laws originate from Spanish property laws which is why most of our bordering states are community property states (red does not mean Republican). Wisconsin has no excuse, and Idaho was just caught in some peer pressure from Washington and Nevada.
Behind the scenes there are some technical things going when electing to be an S Corp. If using a limited liability company, the LLC essentially transfers all of its assets and liabilities to the corporation in exchange for the corporation’s stock and then distributes stock to its shareholders to complete the liquidation. Sounds cool. Read IRS Regulations Section 301.7701-3(g)(1) if you can’t get enough.
The transfer is tax free of course unless the LLC’s liabilities exceed its assets. If this applies to you, please consult with us. Also, Form 8832 Entity Classification Election is generally not required since the Form 2553 S Corp Election supersedes it.
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