In the IRS system, business owners, including those of corporations and limited liability companies (LLCs), must navigate specific procedures to ensure their enterprise is correctly configured for tax obligations. Without intervention, corporations default to being taxed as C corporations, and LLCs are viewed as either a single entity or a partnership, contingent on the number of members. For many organizations, however, choosing to be recognized as an S corporation may be more advantageous. This adjustment is made by submitting IRS Form 2553 to elect S corp status.

Advantages of Submitting Form 2553

Choosing S corporation status brings several advantages for businesses. The taxable income of an S corp is passed through to the owners' personal tax returns, bypassing the corporation itself. This structure is particularly beneficial for new businesses due to the ability to deduct initial losses. Unlike C corporations, which might be taxed at both the corporate and owner levels, S corporations are taxed once, making them a preferable option for many.

Not every business can opt for S corporation status. To be eligible, the entity must be based in the U.S., have no more than 100 shareholders, and all shareholders must be U.S. citizens or residents. Additional criteria determine which businesses can elect for S corporation status. To explore these requirements further and assess if your business qualifies, it's advised to seek generic advice or consultation from an entity management expert or service.