An S corporation is a federal tax election available to an eligible corporation or LLC. To start one in the United States, first form an LLC or corporation with your state, obtain an Employer Identification Number, and file IRS Form 2553, Election by a Small Business Corporation.

Federal rules generally limit an S corporation to 100 eligible shareholders and one class of stock. For example, a calendar-year business seeking an S corporation election effective January 1, 2027, would generally file Form 2553 by March 15, 2027.

The business must meet the IRS ownership and stock requirements, pay working shareholder-employees reasonable wages, keep separate business records, and file an annual Form 1120-S tax return. An S corporation is not a separate state-law entity. It is a federal tax election for an eligible corporation or LLC.

S Corporation Setup at a Glance

Requirement What You Need to Do
Legal entity Form an LLC or corporation with your state
Federal tax status File IRS Form 2553
Tax identification Obtain an EIN directly from the IRS
Ownership Generally have no more than 100 eligible shareholders
Stock Issue only one class of stock
Owner compensation Pay reasonable wages for services performed
Annual federal return File Form 1120-S and provide Schedule K-1s
State compliance File required annual reports and state tax returns

1. Decide Whether S Corporation Taxation Fits Your Business

S corporation taxation can help when an owner-operated business has enough profit to pay the owner a reasonable salary and still make distributions. Wages are subject to payroll taxes, while qualifying non-wage distributions generally are not subject to Social Security and Medicare taxes.

S corporation taxation does not eliminate income tax. It also adds payroll, accounting, and tax filing responsibilities.

An LLC taxed as an S corporation is one option for a small business that wants LLC legal status with S corporation tax treatment. A corporation can also elect S corporation status.

The structure may be a poor fit if:

  • The business has little or no profit after paying a reasonable salary.
  • The owners want to issue multiple economic classes of stock.
  • The business expects venture capital or corporate investors.
  • The owners include partnerships, corporations, or nonresident aliens.
  • Payroll and tax-return costs exceed the expected tax benefit.

The IRS generally requires an S corporation to be a domestic corporation or eligible domestic entity, have no more than 100 shareholders, have only allowable shareholders, and have one class of stock. Certain financial institutions, insurance companies, and domestic international sales corporations cannot elect S corporation status.

2. Choose an LLC or Corporation

You do not create an S corporation by filing only a state S corporation form. You first create the underlying legal entity.

Option A: Form an LLC and Elect S Corporation Taxation

An LLC is formed by filing articles of organization, or a similar document, with the state. The LLC can then file Form 2553 if it qualifies for S corporation treatment.

An eligible LLC that timely files Form 2553 generally does not need to file a separate Form 8832 to elect corporate tax classification. The LLC is treated as a corporation for federal tax purposes as of the effective date of the S corporation election.

Option B: Form a Corporation and Elect S Corporation Taxation

A corporation is formed by filing articles of incorporation with the state. The corporation should also create its corporate records, issue shares, appoint officers and directors where required, and follow applicable state requirements.

The corporation then files Form 2553 with the IRS to elect S corporation treatment.

For many small businesses, the LLC route involves less corporate administration. The right choice depends on state law, ownership, liability concerns, investor plans, and tax circumstances.

3. Register the Business With Your State

File the formation document required by the state where the business is organized. You will generally need:

  • A legally available business name
  • A business address
  • A registered agent
  • Ownership or management information
  • Articles of organization or articles of incorporation
  • The required state filing fee

Most LLCs and corporations need a registered agent. A business may also need to register in every state where it conducts significant business activities. State filing fees, annual reports, franchise taxes, and foreign-registration rules vary.

After formation, create an operating agreement for an LLC or bylaws and corporate records for a corporation. Open a separate business bank account and keep business and personal money separate.

4. Obtain an EIN From the IRS

Apply for an Employer Identification Number, or EIN, after forming the LLC or corporation with the state.

The IRS issues EINs directly and does not charge a fee. The online application is available to eligible U.S. businesses and may provide the EIN immediately. The IRS advises forming the entity with the state before applying because applying first can delay the EIN process.

You will generally use the EIN to:

  • File the business tax return
  • Run payroll
  • Open a business bank account
  • Pay employment taxes
  • Complete business tax registrations

5. File IRS Form 2553

Form 2553 is the document that elects federal S corporation tax treatment.

The form requires information such as:

  • The business's exact legal name
  • The EIN
  • The effective date of the election
  • The selected tax year
  • Shareholder information
  • Shareholder consents and signatures
  • An authorized officer's signature

All shareholders generally must consent to and sign the election. Use the filing address or fax number shown in the current Form 2553 instructions because the correct location depends on the business's state.

Form 2553 Deadline

The normal deadline is:

  • No later than 2 months and 15 days after the beginning of the tax year when the election should take effect; or
  • At any time during the tax year before the election takes effect.

The deadline may move to the next business day when it falls on a weekend or legal holiday.

If the deadline was missed, late-election relief may be available when the business had reasonable cause, acted diligently, and meets the IRS requirements. The IRS instructions generally allow relief for qualifying late elections filed within three years and 75 days of the intended effective date.

Do not assume that filing Form 2553 means the election was accepted. The IRS sends an acceptance or nonacceptance notice. The IRS identifies its acceptance notice as CP261, which should be kept with the company's permanent records.

6. Set Up Payroll and Pay Reasonable Compensation

A shareholder who performs more than minor services for the S corporation is generally an employee of the corporation. The corporation must pay that shareholder reasonable compensation before making non-wage distributions for the shareholder's services.

The IRS considers factors such as:

  • The owner's duties and responsibilities
  • Training and experience
  • Time spent working
  • Comparable pay for similar work
  • Compensation paid to other employees
  • The source of the company's revenue
  • The company's compensation agreements and payment history

The IRS can reclassify distributions as wages if the business pays an artificially low salary to avoid employment taxes. The company should handle wage withholding, payroll tax deposits, employment tax returns, and Form W-2 reporting.

Document how the salary was determined. Useful records can include comparable compensation data, job responsibilities, hours worked, and the company's financial results.

7. Meet Ongoing Federal and State Obligations

After the election becomes effective, the S corporation normally must:

  1. File Form 1120-S each year.
  2. Provide each shareholder with a Schedule K-1.
  3. Run payroll and file employment tax returns.
  4. Make required federal and state tax payments.
  5. Maintain separate accounting and business records.
  6. File state annual reports and tax returns.
  7. Renew licenses and permits.
  8. Maintain the LLC or corporation's required records.

An S corporation generally files Form 1120-S by the 15th day of the third month after the end of its tax year. For a calendar-year S corporation, the regular deadline is generally March 15, adjusted when the date falls on a weekend or legal holiday.

A six-month extension is available by filing Form 7004. An extension to file does not automatically extend the time to pay taxes.

Federal S corporation treatment does not guarantee identical state tax treatment. Some states recognize the federal election, while others impose separate taxes, additional filings, or different rules. Check the tax agency and business-registration requirements in every state where the company operates.

What Does It Cost to Start an S Corp?

The total cost depends on the state and the amount of professional help required. Budget for:

  • State formation filing fees
  • Registered-agent fees, if you hire one
  • Business licenses and permits
  • Annual reports and state franchise taxes
  • Payroll software or payroll-service fees
  • Bookkeeping
  • Form 1120-S preparation
  • State tax-return preparation
  • Legal or tax advice

The EIN is free when obtained directly from the IRS. Recurring payroll, accounting, tax preparation, and state compliance costs are often more important than the initial formation fee.

The main mistake is treating the S corporation election as a substitute for forming a legal business entity. Form the LLC or corporation first, meet the Form 2553 deadline, and establish payroll and bookkeeping procedures before taking owner distributions.