IRS 2553 Instructions: Essential Information You Need to Know

When you own a small business, every decision matters—including how you choose to structure your company. It’s more than just paperwork, your business classification affects how you pay taxes, how profits are distributed, and what legal protections you have.

If you’re considering S corporation (S corp) status, you’ll need to file IRS Form 2553. Selecting S corp for your business may provide tax benefits, but you should understand the process, requirements, and potential drawbacks before switching.

This guide will explain the essentials—what an S corporation is, how it compares to other business structures, and Form 2553 tips to help you file correctly.

Are you ready to explore whether this option makes sense for your business? Let's explain it in simple terms.

S corp vs. C corp vs LLC: What's the difference?

Picking the right business structure is a big deal. Whether you choose S corp, C corp or LLC, each has its own  pros and cons. Let's look at the three most common choices and what they mean for your business.

S corporation

An S corporation gives you the best of both worlds. You get liability protection like a corporation. But your business income passes directly to your personal tax return. This means you avoid being taxed twice on the same money. You'll deal with more paperwork than an LLC, but many owners find the tax benefits worth it.

C corporation

A C corporation exists as a separate legal entity from its owners, generally providing the strongest liability protection available. Your business pays taxes at the corporate level, and shareholders pay additional taxes when receiving dividends—commonly referred to as "double taxation." Despite this drawback, C corporations offer unlimited growth with no restrictions on ownership or number of shareholders. C corp structure is best for businesses that plan to grow big or want lots of outside investment.

Limited liability company (LLC)

An LLC keeps things simple. You get personal protection without tons of formalities. Like S corporations, income passes through to your personal taxes. But you typically won't face the same ownership restrictions. Many small business owners start here because it's flexible and straightforward.

What is IRS Form 2553?

You'll need IRS Form 2553 to elect S corporation status for your business. Otherwise, the IRS typically taxes you under your default classification—sole proprietorship, partnership, or C corporation. Many business owners mix up these important forms:

• Form 2553 – This is what you'll need to elect S corp status
• Form 8832 – This is for businesses choosing C corp or other tax classifications

S corp requirements: Who can file IRS Form 2553?

While a C-corporation, LLC, sole proprietorship, or partnership can file IRS Form 2553 to become an S corporation, not every company registered as one of these types of business meets S corp requirements. To be eligible to apply for S corporation status, your company generally must meet the following criteria:

• Domestic corporation: Only U.S.-based companies may file tax form 2553. Foreign corporations don't qualify, even if they do business in the U.S.
• All shareholders must be individuals, certain trusts, or estates: Other corporations, partnerships, and non-resident aliens cannot be shareholders.
• Have at most 100 shareholders: If you want to run a corporation with more than 100 shareholders, you might consider filing IRS Form 8832 to classify your company as a C-corporation.
• Have only one class of stock: This stock class limitation effectively eliminates different shareholder voting rights in your corporation.
• Eligible business type: Some businesses can't be S corporations. This includes most banks, insurance companies, and international sales corporations.

Your business must satisfy these S corp requirements before filing Form 2553. If your company doesn’t qualify, another structure—such as an LLC or C corp—may be a better fit.

The benefits of registering as an S corporation

Many small businesses choose S corp status for tax savings and operational advantages. Some of the key advantages of S corp election include:

• Pass-through taxation – Business profits and losses pass through to shareholders’ personal tax returns, avoiding double taxation.
• Limited liability protection – Shareholders’ personal assets are typically protected from business debts and lawsuits.
• Potential self-employment tax savings – S corp owners may pay themselves a reasonable salary and take additional income as distributions, which aren’t subject to self-employment tax.
• Simpler ownership transfer – Unlike partnerships or LLCs, ownership transfers are often easier in an S corp.
• Cash method of accounting – S corps may use the cash accounting method, which tracks revenue and expenses when they’re actually received or paid.

The disadvantages of registering as an S corporation

S corp benefits make this structure popular among small business owners, but take time to learn about the possible drawbacks before deciding. Every business is different. Take time to think about your growth plans and how ownership limitations might impact those plans. You’ll need to weigh these S corp disadvantages before you commit. The best choice depends on your situation, goals and how much administrative work you’re willing to do.

Stricter eligibility requirements

S corporations must meet and maintain specific requirements. Watch out for changes that could cost you your S corp benefits—even something as exciting as growth can be problematic if you exceed 100 shareholders or bring in non-U.S. investors. When this happens, you may face surprising tax effects and administrative complications you hadn't planned for.

Increased IRS scrutiny

The IRS pays special attention to how S corporation owners pay themselves. They require a "reasonable salary" be paid to owners before they can take any tax-advantaged distributions. If the IRS considers your salary too low, you could face an audit and additional taxes. So, what does the IRS consider a reasonable salary? It depends on your industry, experience, and what similar positions pay.

Stock ownership restrictions

The stock restrictions of S corporations may box you in when your business is ready to grow. You won't be able to attract foreign investors, which closes some doors for raising money. Also, many growing businesses need different types of stock to attract various investors. These rules might not matter when you're small, but they may become real roadblocks as your company expands.

Less flexibility in profit and losses

S corporations generally have stricter allocation requirements than partnerships and LLCs. Generally, S corporations must distribute profits and losses based on ownership percentages. This may create challenges when business owners contribute different amounts of time, resources, or expertise to the company. These distribution restrictions might not match your preferred approach to compensating owners and stakeholders.

IRS Form 2553 instructions

Filing IRS Form 2553 may seem complicated, but breaking it down into steps may help simplify the process. Here’s a general overview:

1. List your company basics

In the top portion of IRS Form 2553, fill in the boxes for your company's name, address, employer identification number (EIN), date incorporated, and state of incorporation. Then, if your company has changed its name or address since applying for its EIN, check the appropriate option in box D.

2. Enter your tax election information

In box E, write the starting date of the tax year during which you want your S corporation classification first to apply. You generally can't choose any random date–your effective date must be no more than 75 days before you file IRS Form 2553.  If your company is brand new, your effective date should be one of these three options:

• The date your company began making transactions
• The date your company acquired its first shareholders
• The date your company obtained its first assets

Choosing the optimal effective date may significantly affect your tax situation, so it’s generally best practice to consult your accountant before making this selection.

3. Select your fiscal tax year

In box F, check the option corresponding to your choice of fiscal tax year type. This choice will vary depending on your effective date. If you check boxes 2 or 4 within box F, you must complete Part II of Form 2553; otherwise, you may ignore it (and possibly Parts III and IV, too).

4. Designate a point of contact

In box H, you must designate an officer or legal representative, likely your company's lawyer or law firm, whom the IRS may contact.

5. If filing late, look at box I, but save it for later

As mentioned, your company's effective date for becoming an S corporation generally must be no more than 75 days before filing Form 2553. If your effective date exceeds this deadline, use box I to explain why, but don't do so until you've looked at Part IV, which we will discuss later.

6. List your shareholders

In boxes J through N, list your shareholders' names, addresses, taxpayer identification numbers (TINs), personal tax year start and end dates, stock ownership or percentage of ownership, and consent to register as an S corporation. There's only space for seven shareholders – if you have more, you may add extra sheets with the same tables.

7. Sign the form

You will need to sign the top of the next page. A company officer must sign this box and list the company's EIN. Once completed, you may proceed to Part II if needed.

8. Complete Part II if required

If you checked boxes 2 or 4 within box F of Part I, then complete Part II. In this section, choose one of four non-calendar fiscal tax years:

• Natural business year: In this fiscal year, your company's fiscal year begins after its highest-revenue period. This fiscal year may be best for seasonal businesses.
• Ownership tax year: If your shareholders elect to follow a different fiscal year than the calendar year, then your company operates on an ownership tax year.
• Business purpose tax year: This category describes any business reasons besides natural business and ownership for diverging from the calendar year. For example, many universities use the school year as their fiscal year instead of the calendar year.
• Section 444 tax year: If your company makes periodic tax payments throughout the calendar year, you may be able to separate your fiscal year from the calendar year through a law known as Section 444.

Once you've made your selection, skip ahead to Part III.

9. Complete Part III (qualified Subchapter S Trust election) if required

Like Part II, Part III of IRS Form 2553 might not apply to your company. Part III is solely for Qualified Subchapter S Trust (QSST) election. If one of your shareholders will be a QSST, fill out Part III with the requested information about that shareholder. If not, jump ahead to Part IV.

10. Look at Part IV (late corporate classification election representation) if required

Earlier in these instructions, you saw that you must first look at Part IV before filling out, if necessary, box I of Part I. Now that you've arrived at Part IV, look at the acceptable late corporate classification election representation reasons. Then, with those in hand, return to box I or Part I and explain your reason for filing late.

11. Know when to submit Form 2553

If your company is already established, you may file Form 2553 at any time during the prior fiscal year. Companies operating on a calendar-year fiscal year must file Form 2553 by March 15 of the fiscal year during which S corporation status begins.

How to decide if an S corporation is right for you

Now that you better understand S corporations and Form 2553, how do you determine if this structure serves your business needs? Consider discussing these factors with your accountant:

1. Current and projected business income: How would pass-through taxation affect your personal tax situation compared to your current structure?
   
   
2. Future capital needs: Will the S corp restrictions around ownership limit your growth or ability to raise capital?
   
   
3. Administrative capacity: Can your business handle the additional compliance requirements and formalities of S corporation status?
   
   
4. Compensation structure: How would the reasonable compensation requirements impact your business?
   
   
5. Exit strategy: Does an S corporation work with your long-term succession or business sale plans?

Knowing these fundamentals before consulting with your accountant helps you participate actively in the decision-making process. Remember that your business structure should evolve as your company grows and your needs change.