Should your LLC elect S corporation status?

What is an S corporation election?

An S corporation election asks the IRS to tax a business under the S corporation rules instead of its default treatment. Only federal tax treatment changes; the LLC stays an LLC under state law.

Without any election, the IRS looks at how many members an LLC has. For one owner, the rule is that a single-member LLC is disregarded as separate from its owner by default. With more owners the rule is different: a domestic LLC with at least two members is a partnership by default, and that business files Form 1065, U.S. Return of Partnership Income each year.^{3, 4, 5}

An LLC can move away from that default in two ways. Form 8832, Entity Classification Election is the general form for choosing a classification, and the IRS says LLCs can file it to elect their entity classification. The S corporation route uses a different form. In the IRS's words, "A corporation or other entity eligible to elect to be treated as a corporation must use Form 2553," and such an entity doesn’t need to file Form 8832, Entity Classification Election.^{2, 3}

The single-member vs multi-member guide covers the default treatment and Form 1065 in more detail, and what an LLC is explains the business structure itself.³

How do you file the S corporation election?

The IRS form is Form 2553, Election by a Small Business Corporation, signed by all the shareholders. An LLC's owners are its members, and the IRS wording asks for every shareholder's signature.¹

The order of work looks like this.

1. Form the LLC with the state. The state's filing creates the business; the IRS election comes after it. Each state guide, such as forming an LLC in Texas or forming an LLC in Wyoming, lists the formation form and fee.
2. Check the business against the S corporation rules in the next section.
3. Pick the tax year the election should start, and count the deadline from the first day of that year.
4. Complete Form 2553 and have every owner sign it. The IRS says the form must be signed by all the shareholders.¹
5. Send it to the IRS within the deadline described below.

The IRS facts in our records cover the form, the signatures, the deadline and the eligibility list. They don't include the mailing address, a filing fee or how the IRS confirms acceptance, so read the current form instructions on irs.gov before you file.

A business also needs its own federal tax number for many filings; the EIN guide covers when an LLC gets one and how.

When is the deadline to file the S corporation election?

The IRS gives two windows. The election can be filed no more than 2 months and 15 days after the beginning of the tax year the election is to take effect, or at any time during the preceding tax year. A filing outside both windows falls outside the deadline the IRS lists for that tax year.²

The first window runs from the start of the tax year the election should cover. A business that wants S treatment from the first day of a calendar year counts from that first day.

The second window lets an LLC file early, during the year before the one it wants the election to cover. An owner who decides partway through a year that S treatment should begin next year can file during the current year instead of waiting.

New LLCs often ask when their own first tax year begins. The IRS facts we hold don't define that start date for a newly formed LLC, and they don't describe relief for a late election. Both questions belong with the form instructions or a tax professional who can look at your dates.

Which LLCs can elect S corporation status?

An LLC can elect S status only if it meets every item on the IRS list, which reads domestic corporation; only allowable shareholders; no more than 100 shareholders; only one class of stock; not an ineligible corporation.¹

Some of those items are easy to check. The limit of no more than 100 shareholders is a plain count of owners.¹

Other items need a closer look.

• Allowable shareholders. The IRS limits who may own an S corporation. The facts in our records say "only allowable shareholders" without listing who qualifies, so check the form instructions if any owner is a company, a trust or a person outside the U.S.
• One class of stock. An LLC issues membership interests, not stock, and the facts in our records don't say how the IRS applies this rule to them. The form instructions cover it, and the operating agreement guide explains where an LLC writes down each owner's share.
• Ineligible businesses. The IRS excludes certain financial institutions, insurance companies, and domestic international sales corporations.¹

Founders forming from abroad often ask about S status. The allowable-shareholder rule is the part to read for them, and the guide for non-U.S. residents covers the rest of forming from outside the country.

What changes after an LLC elects S corporation status?

Federal tax treatment changes, but the LLC's legal form under state law does not. The business is taxed under the S corporation rules from the tax year the election takes effect.

A few states tie a tax or report to that change.

The IRS facts we hold describe how to make the election and who qualifies. They describe the default treatment it replaces, but they don't describe the S corporation return, owner pay rules or the tax result for any business. We don't state those here.

One figure readers ask about is self-employment tax. For a single-member LLC under default treatment, the IRS rate is 15.3% (12.4% social security tax plus 2.9% Medicare tax) on net earnings; a single-member LLC owner pays it the same way as a sole proprietor. The IRS facts in our records don't say how that applies after an S election, and the answer depends on the business's numbers. Talk to a tax professional about your own figures before you file.⁶

On the state side, the LLC remains an LLC and keeps its state's recurring report, though the next section shows states where federal tax treatment changes which tax or report applies. The annual report guide covers those reports, and the state fees table lists each state's recurring fee.

Do states treat S corporation LLCs differently?

Some do. A few states tie a tax or report to how the LLC is taxed federally, so an S election can change which state filings apply.

• In Vermont, the state's business entity income tax applies to LLCs electing partnership or S-corporation treatment (Form BI-471), and the state lists generally a $250 minimum tax. An LLC in Vermont that elects S status falls inside that tax by the state's own description.⁷
• Alabama's revenue department says "S-corporations, limited liability entities and disregarded entities must file Alabama Form PPT." That return and annual report is filed with the Department of Revenue, not the Secretary of State.⁸
• South Carolina's revenue department draws its line by tax treatment. An LLC is "not subject to the annual report or the License Fee: A Limited Liability Company (LLC) not taxed as a corporation." Our South Carolina tax entry reads: None for an LLC not taxed as a corporation; an LLC taxed as a corporation pays the corporate License Fee (minimum $25). The facts we hold don't say which side of that line an S-electing LLC falls on.⁹

In other states, the published LLC tax is described without reference to federal treatment. California's rule reads "Every LLC that is doing business or organized in California must pay an annual tax of $800." Our Tennessee entry reads: Tennessee franchise tax (0.25% of the tax base, $100 minimum) and excise tax apply to LLCs.^{10, 11}

State tax rules beyond these facts are published by each state's revenue department. The state guides for California, Tennessee, Vermont and South Carolina list each state's report and tax facts.

Can a formation service file the S corporation election?

Some formation plans list the filing as an item. Bizee's plans list "S-Corp Election Filing (IRS Form 2553)" in each of its tiers, alongside "Business Tax Consultation". Bizee Basic is $0 plus the state filing fee.^{12, 13}

The other plan lists we gathered don't name a Form 2553 filing. A provider that doesn't publish the item may still help, so ask before you buy. The Bizee review and Bizee pricing pages show what each tier includes.¹

An owner can also prepare and file the form without a service. The election is an IRS filing, separate from the state formation order, and its deadline runs on the IRS calendar, not on the service's processing time. The full plan list compares what each provider includes, and the cost calculator adds state fees to each plan for the first and second year.

Related guides

A few neighbouring topics come up with the S election.

• How to form an LLC walks through the state steps that come before any tax election.
• How much an LLC costs covers the state fee and service prices.
• Plans for first-time founders are listed with the support each plan includes.