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Electing S-Corporation (S-Corp) status can provide significant tax advantages for small businesses, but the IRS has strict eligibility requirements. To qualify, your business and shareholders must meet certain conditions, and you must follow the correct filing process.

Below are the key requirements for making a valid S-Corp election.

1. U.S. Citizenship or Residency for Shareholders

Eligible shareholders include U.S. citizens, U.S. residents, certain trusts, and estates.

Ineligible shareholders include partnerships, corporations, and non-resident aliens.

This restriction ensures S-Corps remain closely held and not controlled by foreign owners or other business entities.

2. Eligible Entity Type

Your business must be a domestic corporation or an LLC that is eligible to elect corporate taxation.

LLCs often choose S-Corp taxation for the self-employment tax savings while retaining LLC flexibility.

3. Shareholder Limit

S-Corps are limited to 100 shareholders maximum.

Married couples and their estates are typically counted as one shareholder for this purpose.

Exceeding this limit disqualifies the S-Corp election.

4. One Class of Stock

An S-Corp may issue only one class of stock, which means:

• All shares must carry identical rights to profits, distributions, and liquidation proceeds.

• Different voting rights are allowed (e.g., voting vs. non-voting shares), but economic rights must be equal.

5. Unanimous Shareholder Consent

All shareholders must consent in writing to the S-Corp election.

This is done by signing IRS Form 2553, which is submitted to the IRS.

6. Timely Filing of Form 2553

You must file Form 2553 no later than 75 days after the beginning of the tax year you want S-Corp status to take effect.

Alternatively, file within 75 days of forming your business.

If you miss the deadline, you may request late election relief, but this requires reasonable cause.

Why Meeting These Requirements Matters

Failure to meet any of these rules can result in:

• Rejection of your election (your business remains taxed as a C-Corp or LLC).

• Termination of S-Corp status later if eligibility rules are violated.

• Potential IRS penalties and higher taxes.

Conclusion

To qualify for S-Corp status, your business must be a domestic entity with no more than 100 eligible shareholders, issue only one class of stock, and file Form 2553 on time with unanimous shareholder consent. Meeting these requirements ensures your business can enjoy the tax savings, liability protection, and credibility that come with S-Corp status.

Before filing, consult with a CPA or tax professional to confirm eligibility and avoid costly mistakes.