Lesson 2 of 11
Who qualifies for the election
Subchapter S has strict entry requirements. Failing one of them invalidates the election.
General requirements
- The company must be a domestic entity
- No more than 100 shareholders, with certain family members counted as one
- Shareholders must be individuals, certain trusts and estates, and specific exempt organisations
- Partnerships and most corporations cannot be shareholders
- Non-resident alien shareholders are not permitted
- Only one class of stock, though differences in voting rights alone are acceptable
- Certain financial institutions, insurance companies and domestic international sales corporations are ineligible
LLCs electing S status
An LLC can elect S corporation treatment if it meets the same tests. Because an LLC has membership interests rather than stock, the operating agreement should not create economic differences between members that look like a second class of stock.
A single non-qualifying shareholder can terminate the election. Check eligibility again before admitting any new owner.
Not sure whether the election fits?
The numbers depend on your profit, your role in the business and your state. Gullia Filing's tax team reviews your position, prepares Form 2553 where it makes sense, and sets up payroll so the election holds up.