Disclaimer: This article was written by someone other than an attorney or a lawyer. For further legal advice, we recommend Rocket Lawyer.
If you’re here, chances are you’re either doing research before choosing a business structure, or you’ve chosen a business structure, and you’re considering the S Corporation election. Either way, you’re in the right place. This article will show you C Corp vs S Corp Benefits and show you the IRS Form 2553 Instructions.
In January 2017, I decided to incorporate my business after being a sole proprietorship for awhile. I learned about the veteran’s free incorporation benefits for filing in Texas, and I decided I wanted the additional liability protection that comes along with incorporating a business.
I chose to incorporate as a Corporation because I was thinking about the long-term view. I liked the opportunity of allowing employees to buy stock one day, and I liked other scaling options of starting a corporation, but by no means have I arrived at the apex of my goals today! I still have a ways to go, so when I found out I would be double taxed if I didn’t elect to be taxed as an S-Corporation, I filed my Form 2553 right away!
I decided to write this article to save other entrepreneurs from overpaying the government when they could elect S-Corporation Status.
LLC Vs. S Corporation
Unlike me, some people have incorporated as an LLC and may be considering electing S-Corporation status. An LLC who elects S-Corporation status can have its benefits and drawbacks. Let’s discuss both.
The Benefits of an LLC Electing S Corporation Status
The LLC is the most popular business structure, and for good reason. Business owners like the liability protection they can incur by incorporating as an LLC, but otherwise, they can still operate similarly to a sole proprietorship.
There are no quarterly taxes. You don’t have to run a payroll if you don’t want to but you can. The government doesn’t tell you how much you should pay yourself. Finances can still be mingled (personal and business) without many ramifications as long as the government receives what they’re due. The LLC offers quite a bit of liberty.
The one thing that business owners find out about the LLC is….. they are still taxed as a sole proprietor! As a sole proprietor, you have to pay self-employment taxes, and many entrepreneurs find S Corporation election gives them the advantage of saving lots of money on taxes.
The Cons of the S Corporation Election Switch From an LLC
S Corporation election can have major benefits for some, but there are drawbacks. When you switch to the S Corporation, the biggest con is the IRS requires you to pay yourself a reasonable wage. For startup entrepreneurs who have not hit their point of profit yet, paying yourself a reasonable wage can be a huge drawback. Rather than reinvesting in your business, so that you can scale, you would have to pay yourself consistent with what you would be earned while employed somewhere.
In a few states, there are additional rules or the absence of major S Corporation benefits. You can read more about the states that don’t honor the S Corporation election HERE, and you can seek legal counsel to see if this is something you should watch out for in your area.
C Corp vs S Corp Benefits
With a C Corporation, the business structure has huge potential. You can take a business all the way into the public stock market as a C Corp, whereas other business structures are not able. Although We, at How To Entrepreneur, encourage bootstrapping businesses, we know many people want to go the path of pitching investors for an investment. If this is you, and you know you’ll want to pitch investors for your business, choose a business structure that gives you a fair shake. Many investors choose to invest exclusively into C Corporations, and there are lesser venture capitalists who will invest in a business of another structure.
Aside from investment or stock market considerations, electing to be treated as an S-Corp can be advantageous because:
- You avoid the double taxation of the C Corp
- Avoid additional extensive paperwork
Overall S Corporation Election Benefits
Overall, the S Corporation election is becoming more popular for entrepreneurs (especially small businesses and startups) because):
- It can be a temporary election
- Protection from personal liability
- No self-employment taxes
- No double taxation
S Corporation Election Recurring Requirements
As an S Corporation, it’s required that you:
- Set a reasonable salary
- Pay payroll taxes from that
- File the Form 941 Quarterly Tax Form (or have a full-service payroll company do it for you)
- Record the payroll transactions in an accounting system like (Freshbooks or Quickbooks)
- Prepare State Payroll Tax Return
- Prepare Year-End Taxes
S Corporation Election Deadline
If S Corporation Election would save you money, you should be sure to file your S- Corporation Election Form within the time frame allotted. The IRS opens the window to submit S-Corporation elections once per year. You have to submit the forms within 2 months and 15 days from the beginning of the tax year or the form will not be valid until the following tax year. If you are a new company, you can complete the Form 2553 up until 75 days from the date of your incorporation. There are various clauses you can look at. Details about that are on the form, or you can connect with someone at Rocket Lawyer for legal advice by CLICKING HERE.
S Corp Election Form
As of now, the S Corporation Election Form is called the IRS Form 2553. It is a lot of instructions on the form, but if you use them, they should help you to get approved when electing to be treated by the IRS as an S Corporation.
IRS Form 2553 Instructions
Now, let’s fill the form out…
1. To complete the IRS Form 2553, you first want to download the form by CLICKING HERE
2. In the portion of the form where it says “Specific Instructions”, it will tell you exactly what’s expected in each box of the form 2553. Be sure to place the exact information that’s requested otherwise your application could be a waste of your time.
3. Submit the paperwork by mail as directed here (taken straight from the Form 2553):
If the corporation’s principal
business, office, or agency is
Use the following
address or fax number:
District of Columbia, Florida,
Indiana, Maine, Maryland,
Hampshire, New Jersey, New
York, North Carolina, Ohio,
Pennsylvania, Rhode Island,
South Carolina, Vermont,
Virginia, West Virginia
Department of the Treasury
Cincinnati, OH 45999
Fax: (855) 270-4081
Georgia, Illinois, Kentucky,
Michigan, Tennessee, Wisconsin
Department of the Treasury
Kansas City, MO 64999
Fax: (855) 887-7734
Alabama, Alaska, Arizona,
Arkansas, California, Colorado,
Hawaii, Idaho, Iowa, Kansas,
Mississippi, Missouri, Montana,
Nebraska, Nevada, New
Mexico, North Dakota,
Oklahoma, Oregon, South
Dakota, Texas, Utah,
Department of the Treasury
Ogden, UT 84201
Fax: (855) 214-7520
Final Words on IRS Form 2553 Instructions
The goal of this article was to compare for you various legal business structures with the IRS S Corporation election. Hopefully, it helped you to decide when/if this is a good option for you. I’d highly recommend you have a legal consultation with someone at Rocket Lawyer for further legal advice while setting up the legal parts of your business. If you have questions or concerns about this, don’t hesitate to leave them in the comments section. I’ll do my best to help you out!
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Now, it’s Your Turn…
What business structure did you choose? Did you consider the S Corporation election? Are there any details I left out that you would like to add? Please leave your feedback below.