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Key takeaways
- Election made on IRS Form 2553, generally by March 15 of the year the election is to take effect.
- Shareholders must be U.S. citizens or resident aliens; certain trusts and estates also qualify.
- S-corps may not have more than 100 shareholders or more than one class of stock.
- Owner-employees must take “reasonable compensation” as W-2 wages before taking distributions.
How Olomon thinks about this
Olomon is built to handle households with multiple operating entities. For each S-corp, you can store the election letter, K-1s, distribution history, and ownership table alongside the household balance sheet — so the entity, its owners, and the cash flowing between them are all visible at once.
Quick facts
- Maximum shareholders100[1]
- Eligible shareholdersU.S. citizens / resident aliens, certain trusts + estates[1]
- Stock classes allowedOne class of stock (voting differences allowed)[1]
- Election formIRS Form 2553[2]
- Election deadlineBy March 15 (for calendar-year entities)[2]
- Annual tax returnIRS Form 1120-S + Schedule K-1 to shareholders
In-depth definition
S-corporation status is a powerful tax structure for small operating businesses. The election turns the entity into a pass-through for federal tax purposes while preserving the corporate liability shield. The most common pitfall is failing to pay the owner-employee reasonable compensation — a frequent IRS audit issue.
How to elect S-corporation status
The federal procedural steps for an existing eligible corporation or LLC to elect S-corporation taxation.
- 1
Confirm eligibility
Verify the entity is a domestic corporation (or an LLC eligible to elect corporate taxation), has ≤ 100 shareholders, has only U.S. citizen / resident alien individual shareholders (plus certain trusts and estates), and has only one class of stock.
- 2
Obtain an EIN
Apply for a federal EIN if the entity does not already have one (free at IRS.gov, generally issued immediately).
- 3
Get unanimous shareholder consent
All shareholders on the date of election must consent in writing. Their signatures appear on Form 2553 itself.
- 4
File IRS Form 2553
By March 15 (for calendar-year entities)
File Form 2553 (Election by a Small Business Corporation) by the 15th day of the 3rd month of the tax year you want the election to take effect (March 15 for calendar-year entities). Late elections may be granted under Rev. Proc. 2013-30 with a reasonable-cause statement.
- 5
Set reasonable owner compensation
Establish W-2 payroll for owner-employees at IRS “reasonable compensation” levels before taking distributions. Document the basis for the wage decision.
- 6
File Form 1120-S annually
Each tax year
Each year, file IRS Form 1120-S and issue Schedule K-1 to every shareholder, who reports their share of income, losses, and credits on their personal return.
Frequently asked questions
It depends on your income, payroll obligations, state taxes, and growth plans. The S-election can save self-employment tax above a certain income, but adds payroll administration. Run the numbers with your CPA before electing.
Sources
Primary, authoritative references.
- 1
- 2
Internal Revenue Service (IRS)
About Form 2553, Election by a Small Business CorporationCited for: Authoritative election form
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Related terms
More from Taxes & Business.
Cite this page
APAOlomon Editorial Team. (2026). S-corporation. Olomon Financial Glossary. https://olomon.com/financial-glossary/s-corporation