S Corp Businesses Faux Pas To Avoid
- Lea SC
- 3 hours ago
- 2 min read
Choosing to be taxed as an S corporation can offer powerful benefits for small businesses, but the path is narrower than most owners realize. One wrong turn, like missing a filing deadline or having the wrong language in your governing documents, can invalidate your S-election.
The good news? Many mistakes can be corrected if caught in time. Let’s walk through the most common pitfalls, what to do if you discover one, and how to protect your S-status going forward.
Common Pitfalls That Jeopardize S-Status
1. Governing documents that allow unequal treatment
If your operating agreement or articles of incorporation leave room for unequal distributions, even if you’ve never used them, the IRS may say your corporation doesn’t meet the “single class of stock” requirement. This often happens when LLCs convert but keep old agreements.
2. Filing Form 2553 late
To elect S-status, Form 2553 must usually be filed within the first 2½ months of the tax year. A late filing doesn’t always mean disaster, but it does require seeking relief.
3. Missing consents in community property states
In community property states, both spouses often need to consent to the election. Forgetting one signature can undermine the S-status.
4. Trust elections that slip through the cracks
Trust shareholders (such as ESBTs or QSSTs) have their own election deadlines. Missing them can invalidate the S-election.
Fixing Mistakes: Relief Options
The IRS provides several ways to get back on track:
Rev. Proc. 2013-30: Offers relief for late elections when intent to be an S corporation was clear but paperwork slipped through the cracks.
Rev. Proc. 2022-19: Provides a simplified fix for certain governance mistakes, avoiding the need for an expensive ruling.
Private Letter Rulings: When no automatic relief applies, you can still request a ruling—but it’s costly (as of 2025, the user fee is $43,700).
Best Practices to Stay Compliant
Keep your paperwork in order. Retain signed copies of all elections and governing documents.
Review operating agreements before filing. Make sure they match S-corp requirements.
Act quickly if issues arise. Relief is time-sensitive, and earlier action can save you money and stress.
Think ahead to transactions. Buyers and investors will expect proof of valid S-status during due diligence.
Key Takeaway
An S-election can be one of the smartest tax moves for a small business—but it comes with rules that leave little room for error. By keeping records clean, filing on time, and knowing where relief is available, you can avoid costly surprises.
As industry experts have noted (including in The Tax Adviser, May 2025), many S-corp problems aren’t about bad intent—they’re about small oversights that snowball. With the right guidance, those oversights can often be fixed before they become deal-breakers.
What to Watch For | How to Fix It |
Governance docs allowing unequal distributions | Rev. Proc. 2022-19 (fix internally if possible) |
Missed Form 2553 deadline | Rev. Proc. 2013-30 (if timely reporting) |
Missing trust or spouse consents | Seek relief quickly or get guidance |
No relief path? | Letter ruling (S-election restoration, fee applies) |
✅ At A Bigger Bottom Line, we help business owners navigate these rules with confidence. Whether you’re forming a new entity or double-checking your S-election for an upcoming sale, we’ll make sure your status stays rock solid.
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