What is an S Corporation?

After many years of experience, I’ve learned that CPA’s and Clients alike are just as confused about what exactly is an S Corporation, so I decided to shed some light on the topic considering there is so much conflicting and erroneous information online. The fact that there are so many business owners who automatically choose to take this tax designation for their business without clearly understanding what it is or how to comply with this election can be a recipe for disaster. 

Let me begin by saying…First and foremost, it is NOT a legal entity or company. If you walk away after reading my blog on this topic learning only 1 thing….Know this, that an S Corporation is not a legal entity and does not change your state’s legal entity structure.

A legal entity can make an election to be taxed under Subchapter S of the Internal Revenue Code section 1362(a) that meets the tests under this tax designation. It does not change your legal entity structure under the state that governs your company, but rather it is a Federal tax election that is generally made at the time the company is created and compliance is demanded by the IRS, not optional. Once the tax election is made, you must comply with both Federal and State employment tax rules under this election. You can reference instructions for this election by going to https://www.irs.gov/instructions/i2553.

A company, whether it is an Inc., Corp., PA, , Ltd., LLC or PLLC, etc. should consult with a tax professional and evaluate whether making an S Corporation election is right for you and your company. Not every company should or can make the S Corporation election and be taxed under Subchapter S of the Internal Revenue Code 1362(a).

So many times, I’ll ask a prospective client how they are organized from a legal entity prospective and most times they’ll say “I am an S Corporation”. Well, that is the WRONG answer.

An S Corporation happens to be a tax election and not a legal entity. This is the clear distinction, that it is a “tax election.”

I recommend consulting with a tax professional who specializes in business tax to determine if an S Corporation is right for you and your business. Although there are tax benefits of making an S Corporation election, I can’t stress enough that it is not a one size fits all tax election for all companies and individuals.

Consider the following:

  1. Does your company qualify to make an S Corporation election?
  2. Do you understand all of the requirements under this tax designation before making the election?
  3. Do you understand the consequences of noncompliance?
  4. Do you know how this election will impact your business and personal tax returns?

These are just a few questions you should have a general understanding of when choosing to make the S Corp election. I recommend you work with a tax professional that is experienced and knowledgeable about what is required and how they will help you be and stay compliant as you go about your business.

Once you know whether making an S Corporation Election is right for you and your business, Form 2553 Election by a Small Business Corporation must be properly and timely filed. There are very specific requirements for eligibility and filing.

Do not let this two-page form fool you, it looks simple enough, right? So many times, I’ve seen prospective clients come in and “assume” they are an S Corporation when they are not and the consequences are never good. Either because they relied on someone who was inexperienced and the form was improperly filed or not filed at all, or they did not qualify, did not timely file the form, etc. just to name a few I’ve seen over the years in the field.

Remember, compliance to the law is demanded by all government authorities and not ask for as a favor. It is your responsibility to hire experienced and knowledgeable professionals when it comes to your business or deal with the consequences. This is not an area to cut corners as the consequences of improperly filed tax documents can have a long-lasting effect on your business and family.

I specialize in keeping companies compliant and we know the rules at NES Tax & Accounting, LLC, we want to see every client reach their goals and avoid overpaying/underpaying their taxes and avoid notices, penalties and interest.

Call us today for an initial free consultation.