Can You Make An S Corporation Election?

If you have looked into setting up your own company, you may have come across references to an “S Corporation Election”. Simply put, an S corporation¬†election is a choice that you can make that allows owners to pass corporate income, losses and credits on to their shareholders. That means that the owners avoid “double taxation” where income is taxed at both the corporate level and the shareholder level.

Whether or not this makes sense for your individual business will depend upon a number of factors that are outside of the scope of this article, but before even getting to that it is important to determine if your corporation is even eligible for an S corporation election. As always, thinking ahead will avoid headaches and disappointment later.

Eligibility for the S Corp Election

The S corporation election means that you are asking the IRS to tax your corporation differently, and that means that they have certain eligibility requirements before allowing that different taxation to occur. Here they are, taken directly from the IRS website:

  • The corporation must be a domestic corporation. That means that foreign corporations are generally not eligible to make the S corporation election.
  • Have only allowable shareholders. As far as the IRS is concerned, allowable shareholders include individuals, certain trusts and estates. Not allowed are non-resident alien shareholders, partnerships are corporations.
  • Up to 100 shareholders. To be eligible for an S corporation election, there can only be up to 100 shareholders in the corporation.
  • Not be an ineligible corporation. Certain types of industries are barred from making an S corporation election (insurance companies and certain financial institutions are two examples).

Those are the basic requirements that must be met if you want to make the S corporation election. Whether or not doing so makes sense for your business is a question best presented to your attorney and accountant; the choice will depend upon the type of business that you are operating, your expansion plans, your revenue and a number of other things.

If you want to discuss your options in setting up your business with us, you can set up a time on our online calendar and we will give you a call.