A regular corporation, also known as a C corporation, can make an election with the Internal Revenue Service to receive special tax treatment as a small business corporation under Subchapter S of the tax code: The C corporation is then considered an S corporation. This designation changes only how the corporation is treated for tax purposes. The IRS has established a list of requirements that a C corporation must be able to satisfy to qualify for the election. An S corporation can have a maximum of 100 shareholders, none of those shareholders can be limited liability companies, corporations, or nonresident aliens, and it can have only one class of stock. The IRS requires all shareholders to consent to the election in writing.
Fit your business needs with the right LLC package
Call a meeting of the board of directors. Vote to bring a recommendation to convert the C corporation into an S corporation to the shareholders for approval. Draft a board resolution memorializing the majority vote, and file the resolution with the corporate records.
Call a meeting of all shareholders. Vote to make an S corporation election. This vote must be unanimous. The IRS requires all shareholders to consent to the election in writing. Record the vote in the meeting minutes and file the minutes in the corporate records.
Draft an election consent form. There is no specific format for this document. It must simply state that the corporation intends to make a Subchapter S election and when it will be effective. The consent form should be signed by all shareholders and notarized.
Download IRS Form 2553, Election by a Small Business Corporation, and the instructions from the IRS website. Fill out the form. The form requests basic information about the corporation, a list of the names, addresses and Social Security numbers of the shareholders and their signatures. It requires the person preparing the form to sign a statement under oath that the corporation qualifies to make the S corporation election.
Attach the election consent form to Form 2553 and file them with the IRS. Send it to the business processing center that handles your area of the country by referring to the form instructions. The election is not effective until the IRS approves it. You will receive an approval letter from the IRS indicating the effective date of the election.
File an S corporation tax election with the state where your corporation is headquartered. Contact the government tax agency that processes business tax returns. Request an S corporation election form. They will either mail it to you or have it available for download from the state website. Fill it out. Attach the IRS approval letter and submit it to the agency. The state will send you an election approval letter also.