← All articles

What Is IRS Form 2553? Pros and Cons of Electing S Corporation Status

By Derek J. Hartsfield, CFO · Published October 18, 2026 · Last reviewed October 19, 2026

Form 2553, Election by a Small Business Corporation, is how a corporation or an eligible LLC elects to be taxed as an S corporation. An S corporation generally does not pay federal income tax itself. Its income, losses and deductions pass through to the owners, who report them on their personal returns.

Who can elect

According to the IRS instructions, the business must be a domestic corporation, or a domestic entity eligible to be treated as one, and it must meet these tests:

• No more than 100 shareholders.
• Shareholders must be individuals, estates, certain trusts or certain tax-exempt organizations. A nonresident alien generally cannot be a shareholder.
• Only one class of stock. Differences in voting rights are allowed.
• Every shareholder must consent to the election.

The deadline

Form 2553 is generally due no more than two months and 15 days after the beginning of the tax year the election should take effect, or at any time during the preceding tax year. An LLC that files it, and that qualifies, is treated as having elected corporate classification, so it does not also need Form 8832. If the deadline is missed for reasonable cause, the IRS offers late-election relief, generally within three years and 75 days of the intended effective date. That relief has conditions and should be pursued with a tax professional.

Potential advantages

• Pass-through taxation. There is generally no separate federal income tax at the company level, which avoids the double taxation that applies to a regular corporation.
• Potential payroll tax savings. Owners who work in the business are paid a salary, which is subject to payroll taxes, and may also receive distributions of profit, which are not subject to payroll taxes in the same way. This is the most common reason owners consider the election.
• Liability protection is unchanged. The election affects taxes, not the legal protection of the entity.

Potential disadvantages

• Reasonable salary required. Owners who work in the business generally must be paid a reasonable salary before taking distributions. The IRS looks closely at salaries that appear too low.
• Payroll becomes mandatory. That means payroll software or a provider, quarterly filings and year-end forms.
• More complex returns. The company files its own return and issues a Schedule K-1 to each owner.
• Ownership restrictions. The shareholder and one-class-of-stock rules limit future investors and some ownership structures.
• Pro-rata distributions. Distributions generally must follow ownership percentages, which limits flexibility compared with a partnership.
• Basis tracking. Each owner’s tax basis limits how much loss they can use and affects how distributions are taxed, so it has to be tracked every year.
• State taxes still apply. Some states tax the entity regardless of the federal election. Texas, for example, has a franchise tax that applies to LLCs and corporations.

A practical test

The election is generally worth examining when the business earns steady profit comfortably above a reasonable salary and the owners are willing to run payroll. If profit is small or irregular, the extra payroll cost and compliance can outweigh the savings. The numbers decide, so the comparison should use your real figures.

Questions to bring to your tax professional

Before filing, ask whether your expected profit supports paying yourself a reasonable salary, how the election affects state taxes where you operate, and whether the deadline for the election is still open for the year you want it to apply. These answers depend on your facts, which is why the decision belongs with a tax professional who works only on tax.

What it means for your books

An S corporation needs its accounting set up for it: a payroll expense and liability structure, owner salary kept separate from distributions, and equity accounts that track basis-related activity. When owners are paid through draws in a file that should be recording payroll and distributions, the financial statements and the tax return stop agreeing. Fixing the chart of accounts and the equity activity is a common part of a QuickBooks cleanup.

Official IRS forms

• Form 2553, Election by a Small Business Corporation and its instructions
• Form 8832, Entity Classification Election

Sources: IRS, Instructions for Form 2553 and Limited Liability Company (LLC). This article is general information, not tax or legal advice. Rules change and every situation is different, so confirm your choice with a qualified tax professional before you file.

* The $99 starter covers one bank or credit card account in QuickBooks Online with fewer than 100 transactions in one month. Transactions are categorized and the account is reconciled for that month. Starter rate available through the date shown on the home page.