Trap 3 · Eligibility · From Chapter 9
S Election Eligibility: The Rules That Quietly Kill Elections
An S election requires an eligible company: 100 or fewer shareholders, one class of stock, and qualifying U.S. owners — plus Form 2553 filed on time. Miss any requirement and the election is invalid or terminated, often discovered years later at the worst moment.
The eligibility list
One hundred or fewer shareholders. One class of stock — equal distribution and liquidation rights. Qualifying owners only: U.S. individuals, qualifying trusts and estates. No partnerships, no corporations, no nonresident aliens as shareholders.
The filing deadline
Form 2553 due within 2 months and 15 days of the tax year's start for current-year effect. Miss it and the election waits a year — unless late relief applies.
Breaking it later
Death, divorce, and sloppy buy-sells cause most mid-stream terminations: an ineligible new owner, or rights that create a second class of stock. Review the shareholder list before every transfer.
Trap questions, answered
- Can an LLC elect S treatment?
- Yes — the most common S-corp in America is an LLC with a Form 2553 on file. Same company, different tax math.
- What kills an S election mid-stream?
- An ineligible shareholder, a second class of stock, or over 100 shareholders. Death, divorce, and sloppy buy-sells cause most terminations.
- Missed the deadline — is it fatal?
- Often not: late-election relief under Rev. Proc. 2013-30 can backdate the election when reasonable cause exists.
From the practice: S-corp vs LLC, compared
The other traps: Reasonable Compensation · Distributions vs Salary · Built-In Gains Tax · Late S Election Relief