S corporations are really not a separate entity from a corporation. When a company files Form 2553 with the Internal Revenue Service (IRS), to be elected and treated as an S-Corp, it simply changes the tax status of a company by reducing its tax burden with the with the IRS. It does not change the actual entity structure of a company.
When a Company applies for subchapter S status, its income, losses, and tax deductions are passed through to the members or shareholders, which reduces the overall tax liabilities (including Social Security, Medicare and FICA). to the owners.
Also, operating as an S corporation provides its owners with the opportunity to receive income from the business, as both compensation and dividends.
Note: Let’s say, an LLC chooses to be taxed as an S Corp, it’s still an LLC. The S election simply affects the way it is taxed, and not its entity type. If you formed an LLC, its advised for you to discuss the pros and cons with your accountant.
If a company’s shareholders do not elect to be taxed as an S corporation, the corporation will be a separate taxable entity and will pay taxes on its earnings. (Which is referred to as being taxed as a C corporation – subjected to double taxation by the IRS.)
IRS instructions dictates that for filing Form 2553, if you decide on choosing S Corp status:
You must complete and file No Later than two months and 15 days after the beginning of the tax year for the election take effect (in general, this is by March 15, unless your company has a different-defined tax year), and for a shorter tax year of less than three (3) months, Form 2553 must be filed by the 15th day of the 2nd month of that tax year (i.e. if your entity was formed on October 30th - your first official tax year in business is less than two & half (2.5) months, which means you’re required to for the “S. election” by Jan. 15th of the following year), or at any time during the preceding the tax year for the subchapter S election to take effect.
Don’t stress, if you’ve missed the filing deadline; if you meet certain conditions, you can still file Form 2553 after the past due date and get IRS approval on making your company S Corp elected and receive retroactive status from the beginning of your company’s tax year.
IRS Form 8832 is required for circumstances where your business entity is not a corporation, yet you’d like to be classified as an S Corporation, but you haven’t filed the normal paperwork within the IRS’ specified timeline. Usually single-member limited liability companies (LLCs) that want S Corporation tax status.
Form 8832 acts as an enhancement to Form 2553, which lets your company retroactively file both forms at the same time, and receiving retroactive classification and election as an S Corporation.
Note: In order to qualify for relief by filing Form 8832, your entity must adhere to certain conditions for eligibility.