Incorporation 101: The Process of S-Corporation Election.

Eligibility for S-Corporation Status

In order to elect S-Corporation status, a corporation must satisfy the following requirements:

• Must be a domestic corporation that is organized under the laws of any state or U.S. territory,

• Maintain only one class of stock,

• Maintain a maximum of 100 shareholders,

• Shareholders may only be individuals, estates or certain qualified trusts,

• All shareholders must either be U.S. citizens or legal residents.

S-Corporation Status Election

The election of S-Corporation status is made by filing a form called "Election by a Small Business Corporation" with the IRS Service Center, where the corporation files its corporate federal income tax return. The election of the S corporation status must be unanimously approved by all of the shareholders by having all of them sign the "Election by a Small Business Corporation" form.

When Should the Election Be Filed?

In order for the election to be effective as of the beginning of that tax year, election must be filed on or before the 15th day of the 3rd month of the corporation's tax year. For example, a corporation that is on acalendar tax year must file on or before March 15th in order for the election to be effective for that tax year.

Termination of S-Corporation Status

S-Corporation status can be terminated either voluntarily or involuntarily:

• Voluntarily: an S-Corporation election may be voluntarily revoked with the consent of shareholders holding more than 50 percent of the outstanding shares of stock (voting and nonvoting) on the day the revocation is made.

• Involuntarily: an S-Corporation status is involuntarily terminated if any of the disqualifying events occur. A disqualifying event is one that would prohibit the corporation from making the election in the first place. Examples of disqualifying events would include having more than 100 shareholders, a shareholder that is other than an individual, estate, or trust, or a shareholder who is a non-resident alien.

Generally, the election is automatically terminated as of the date on which the disqualifying event occurs. However, if a corporation has both accumulated earnings and profits as well as passive investment income that exceeds 25 percent of the corporation's gross receipts for three consecutive years, the corporation election will be terminated beginning with the following tax year.

Re-election of S Corporation Status

A corporation may re-elect S corporation status only on the 5th year after the year in which the termination or revocation became effective.