An S-corporation is not a state law entity designation, similar to a Florida corporation or a Florida limited liability company. However, an S-corporation is merely a federal income tax classification made on a specific Internal Revenue Service form (Form 2553). Thus, one can form a Florida limited liability company (“LLC”) and elect to be an S-corporation for federal income tax purposes with the Internal Revenue Service (“IRS”).
Who is eligible to make the election?
Generally, the entity wishing to make the election needs to be a domestic corporation or an LLC. However, certain types of businesses are ineligible to make the election, such as insurance companies or financial institutions. In addition, the entity must have eligible shareholders, meaning the owners of the entity must meet specific requirements of the Tax Code.
Who can be an eligible shareholder?
- So long as the individual is not a non-resident alien, individuals are eligible S-corporation shareholders. Individuals may co-own an S-corporation with other individuals, such as husband and wife, as joint tenants by the entirety.
- If an individual shareholder declares bankruptcy, the bankruptcy estate is a permissible S-corporation shareholder. If an individual shareholder passes away, their estate is an eligible S-corporation shareholder, as well.
- Testamentary Trusts. These trusts become effective upon the death of a shareholder and hence become eligible to be an S-corporation shareholder.
- Voting Trusts. Shareholders may create these trusts to temporarily transfer their shares to the trustee to combine their voting power. Voting trusts are eligible to be S-corporation shareholders.
- Qualified Subchapter S Trust (“QSST”). A QSST is an eligible S-Corporation shareholder if it meets specific rigid requirements.
- Small Business Trust (“ESBT”). An ESBT is a trust for beneficiaries that are all eligible s-corporation shareholders that acquired their trust interest by lifetime gifts or upon the death of an owner. These are more flexible trusts than the QSST described above.
Coming back to the opening question of an LLC or an S-corporation, so long as the individuals forming the LLC are eligible shareholders described above, the LLC can make the election treated as an S-corporation.