S-corp eligibility: who can file Form 2553
Reviewed by the Nexus by State research team against IRS forms, instructions and the Internal Revenue Code (sources below).
A corporation, or an entity eligible to elect to be treated as one (such as an LLC), can elect S status only if it passes every test under Who May Elect in the Form 2553 instructions, which restate IRC §1361(b).
The tests
- It is a domestic corporation, or a domestic entity eligible to elect to be treated as a corporation, that files Form 2553 on time (or qualifies for late-election relief).
- It has no more than 100 shareholders.
- Its only shareholders are individuals, estates, exempt organizations described in section 401(a) or 501(c)(3), or certain trusts described in section 1361(c)(2)(A).
- It has no nonresident alien shareholders (other than as potential current beneficiaries of an ESBT).
- It has only one class of stock, disregarding differences in voting rights.
- It is not an ineligible corporation: a bank or thrift using the reserve method for bad debts under section 585, an insurance company taxed under subchapter L, or a DISC or former DISC.
- It has or will adopt a permitted tax year: December 31, a natural business year, an ownership tax year, a section 444 year, or another year with a business purpose.
- Each shareholder consents.
Counting to 100
A husband and wife (and their estates) count as one shareholder, and all members of a family as defined in section 1361(c)(1), and their estates, can be treated as one shareholder. Everyone else counts separately.
Who cannot own shares
Partnerships, corporations and multi-member LLCs are not eligible shareholders, and neither is a nonresident alien. A trust must fit one of the categories in section 1361(c)(2); a QSST or ESBT needs its own election. A parent S corporation that owns all of a subsidiary can treat it as a qualified subchapter S subsidiary with Form 8869.
One class of stock
A corporation is generally treated as having one class of stock if all outstanding shares confer identical rights to distribution and liquidation proceeds; differences in voting rights are allowed (Regulations section 1.1361-1(l)). For an LLC, look at the operating agreement: preferred returns or special allocations can create a second class.
Run the free eligibility and deadline check to test your answers against these rules.