S Corp Election for a New Business: Form 2553 From Day One

When is Form 2553 due for a new business?

A brand-new LLC or corporation that is eligible can be an S corporation from its first day if every required owner consents and it files a signed Form 2553 no later than 2 months and 15 days after its first tax year begins (IRS Form 2553 instructions). That first tax year begins on the earliest of three dates: the day the company first has owners, first has assets, or begins doing business. The year does not wait for the first sale, and the state approval date starts it only if one of those three things happens that day.

The case is not simple when:

• money, equipment or work moved into the company before anyone wrote down the dates, so the start date is unclear;
• there is more than one owner, or an owner is married in a community property state, because every required person must sign;
• an owner, or an owner's spouse, is not a US citizen or US resident, or outside investors are planned;
• the company is in a state with its own S election, such as New York;
• Form 2553 was filed but no acceptance notice (CP261) has come, or it shows a different start date;
• the deadline has already passed.

Gather before filing:

• the state approval (articles or certificate) and its effective date;
• the date of the first deposit or other contribution, and the date shares were issued or members admitted;
• the date the business began operating, if earlier;
• each owner's name, address, Social Security number, shares or ownership percentage, and the date acquired;
• the company's EIN;
• the planned salary for each working owner and the date payroll will start.

How do I form an S corp: LLC or corporation?

No state forms an S corporation: you form an LLC or a corporation under state law, then file Form 2553 so the IRS taxes it as an S corporation. Either one can elect, and once the election takes effect both follow the same federal rules: both file Form 1120-S, give each owner a Schedule K-1 and pay working owners wages. They differ before the election takes effect (see the table) and in state law and paperwork, such as formation and annual fees, and whether the company runs on an operating agreement or on bylaws and board minutes.

An LLC that files Form 2553 is treated as a corporation from the election's effective date and does not need Form 8832 (Form 2553 instructions; Form 8832 instructions). Filing Form 8832 to be taxed as a corporation, without Form 2553, makes the LLC a C corporation instead.

An LLC must also meet the one-class-of-stock rule: every owner's rights to distributions and liquidation proceeds must be identical (Form 2553 instructions). Special allocations or preferred returns in an operating agreement can conflict with that rule. See operating agreement tax terms.

When does a new company's first tax year start for Form 2553?

A new corporation's first tax year starts on the date it first has shareholders, acquires assets or begins doing business, whichever comes first (Treas. Reg. 1.1362-6(a)(2)(ii)(C)). Having incorporators alone (the people who file the incorporation papers) does not necessarily start it. The Form 2553 instructions apply the same test to an LLC, with owners in place of shareholders.

Common ways the clock starts:

• founders receive shares, or members are admitted to the LLC;
• an owner deposits money in the company's account or gives it equipment;
• the company starts operating, before any sale.

Two traps follow. Counting from the first sale, or from the end of the first month, gives a deadline that is too late. Filing before the first tax year begins is the opposite mistake: a company with no earlier tax year cannot make a valid election before its first year starts (Treas. Reg. 1.1362-6(a)(2)(iii), Example 1). The start date goes on line E of Form 2553.

How do I count 2 months and 15 days, and can I file after April 15?

Count two months from the start date, ending the day before the same day of the month two months later, then add 15 days (IRS Form 2553 instructions). A company whose first tax year began after February 1 can file after April 15 and still be on time, because its deadline runs from its own start date.

A due date that falls on a Saturday, Sunday or legal holiday moves to the next business day (26 U.S.C. 7503).

An existing calendar-year company electing for its next year can file any time during the year before, or by March 15 of the year the election starts (26 U.S.C. 1362(b)). A new company has no year before its first, so for that first year only the 2 months and 15 days window applies.

Who signs Form 2553, and what goes on line E?

An authorized officer signs the election, and every shareholder signs a consent; a form without the officer's signature is not treated as timely filed (IRS Form 2553 instructions). Line E is the date S status starts: for a first-year election, the earliest day the company had owners, had assets or began doing business, which is usually not January 1.

For an election filed on or after the line E date, everyone who owned shares at any time from that date until filing must consent, including anyone who has since sold. When shares or their income are community property, both spouses consent, and each joint owner consents (Treas. Reg. 1.1362-6(b)). Without every required consent the election is not valid, though the regulation allows extra time to file a missing consent in some cases. The company must also be eligible on every day from the line E date to filing: only eligible owners and one class of stock. If it is not, or a former owner from that stretch did not consent, a timely election takes effect only the next tax year (26 U.S.C. 1362(b)(2)). So shares first issued to another company or to a nonresident alien, or a preferred return in the operating agreement, must be right from the line E date, not just fixed before filing.

How do I file Form 2553 and confirm the IRS accepted it?

Fax or mail the signed form to the IRS service center for the state where the company's principal business is; the IRS where-to-file page lists the current address and fax number. If you fax it, keep the original with the company's permanent records.

Keep proof of filing: a certified or registered mail receipt, its equivalent from a designated private delivery service, or a copy the IRS stamped as received or accepted. The IRS generally answers within 60 days. Acceptance comes as notice CP261: keep it permanently and check its effective date, because a date different from line E means the IRS found the form late for the date requested (IRS CP261 notice).

If no answer arrives within 2 months of filing, the instructions say to call the IRS at 1-800-829-4933. For a missing letter, a CP264 denial or a lost CP261, see late S corporation election relief.

What must be in place in year one for the S election to work?

The election changes only how the company is taxed. Year one also needs payroll for owners who work in the business and books that can produce Form 1120-S from the line E date (Form 1120-S instructions).

The first Form 1120-S is due by the 15th day of the third month after the first tax year ends; see the first tax year of a new company.

Does my state need its own S election in the first year?

Some states need their own S election or tax S corporations differently, so check the state before relying on the federal filing. New York, for example, requires Form CT-6, and a corporation organized there must file it for its first year within two months and 15 days after its certificate of incorporation takes effect (New York's example: effective June 15, due August 30), so it can come before the federal deadline (New York CT-6 instructions). New York City has no S election and taxes S corporations under its General Corporation Tax (NYC Department of Finance). For the details and other states, see state S corporation elections.

What if I miss the Form 2553 deadline for a new company?

A late election is generally treated as made for the next tax year, so S status starts then (26 U.S.C. 1362(b)(3)). Until then, a corporation files as a C corporation, and an LLC keeps its default treatment, because its deemed corporate classification starts only when the S election takes effect (Treas. Reg. 301.7701-3(c)(1)(v)(C)). On that date the LLC is treated as moving its assets and debts into a corporation for stock (paragraph (g)(1) of the same regulation); see books after an S corporation election. Form 1120-S is not filed for any year before the election takes effect.

The other route is late election relief under Rev. Proc. 2013-30, requested within 3 years and 75 days of the line E date (IRS Form 2553 instructions). Relief is not automatic, and a corporation and an LLC each have their own conditions; see late S corporation election relief.

When is S corp status from day one a mistake?

S status from day one can cost more than it saves, or end without warning, in these cases:

• Low or uncertain first-year profit. Payroll, a separate return and any state fees start at once, while any saving depends on profit above a reasonable salary. An LLC that waits keeps its default treatment until a later election takes effect. A corporation that waits is a C corporation until then, and if it switches later, gains built up before the switch can still be taxed at the corporate level for 5 years (26 U.S.C. 1374). See when an S election pays off.
• Outside investors are planned. An S corporation can have only one class of stock, and partnerships, corporations and nonresident aliens cannot own its shares (IRS Form 2553 instructions). Investors who want preferred shares do not fit; see C corporation or S corporation.
• An owner, or an owner's spouse, is not a US citizen or US resident. A nonresident alien shareholder makes the company ineligible, and S status ends on the date that happens (26 U.S.C. 1362(d)(2)). The same applies from the day a nonresident alien spouse gains a current ownership interest in the shares under a state community property law or a foreign country's law, unless the couple's section 6013(g) choice to treat that spouse as a US resident is already in effect (Treas. Reg. 1.1361-1(g)). See S corporation eligibility. A US citizen living abroad stays eligible but faces other trade-offs: see LLC or S corporation while living abroad.
• Changing your mind later. After S status ends, a new election generally needs IRS consent for any tax year before the fifth tax year after the first tax year in which termination took effect (26 U.S.C. 1362(g)).

Example

These examples are illustrative; amounts are in US dollars. In each, every owner is a US citizen or resident and the company has one class of stock.

LLC formed and funded the same day

A one-owner LLC is approved by the state on March 1, and the owner deposits US$5,000 into its bank account that day. Its first tax year begins March 1. The two-month period ends April 30, so Form 2553 is due by May 15. The owner files on May 10 with March 1 on line E. Once accepted, the LLC is an S corporation from March 1, the owner's first salary goes through payroll, and the first Form 1120-S covers March 1 to December 31.

Corporation formed before the founders bought shares

Three founders incorporate on January 20, but the corporation issues no shares, holds no assets and does no business until April 1, when the founders buy their shares for US$30,000 in total. Its first tax year begins April 1, so Form 2553 is due by June 15, and all three founders sign as shareholders. A Form 2553 filed in February would not be valid, because the first tax year had not begun. If one founder had deposited money in a corporate account on March 10, the year would begin March 10 and the deadline would be May 24.

LLC that filed Form 2553 in August

A one-owner LLC is approved and funded on February 1, so its deadline is April 15. The owner files Form 2553 on August 1. Without relief, the election takes effect next January 1, and this year's profit stays on the owner's own return. If the owner instead asks for relief under Rev. Proc. 2013-30 with February 1 on line E and it is granted, the US$40,000 of owner draws taken since February need review, because part may have to be treated as wages. See S corporation payroll never run.

Different for you?

• You are about to file Form 2553 and the start date, line E or the owners who must sign are unclear: get corporate tax help before filing; a wrong date can push S status to the next year.
• Your operating agreement has special allocations or preferred returns: see operating agreement tax terms and get corporate tax help before filing Form 2553.
• You filed and have no CP261 after 2 months, it shows a different date, or the deadline has passed: see late S corporation election relief and get corporate tax help.
• You are not sure S status pays off at your profit level: see should you elect S corporation status.
• An owner is not a US citizen or resident, or investors are coming: see S corporation eligibility and C corporation or S corporation.
• You need to set the owner salary: see S corporation owner salary.
• Your company is in New York State or City, New Jersey or another place with its own rules: see state S corporation elections.
• You need books that will support the first Form 1120-S: see S corporation bookkeeping and get bookkeeping help.