The S election is a form. Keeping it is drafting.
You filed Form 2553 and the letter came back accepted. What decides whether the election is still there in three years is a paragraph in your operating agreement, written by somebody who was not thinking about Subchapter S at the time.
This sheet sets out the rule that governs it — word for word, marked and glossed — then the six provisions that trip it, the calendar the filing runs on, and the four entity choices with the place each one breaks. No 2026 figure appears anywhere on it, and there is a reason.
$200 for thirty minutes, by video. Read this first — most of it is free and none of it is advice about your company. Or call 281-797-8389.
What she charges
Published rates| Initial consultation | 30 minutes | $200 |
|---|---|---|
| Everything after it | per hour | $395 |
| Operating agreement | flat fee | $1,500–$10,000 |
| Monthly retainer | — | not offered |
| Payment | in advance | PayPal |
Where the flat fee lands in that range is mostly a question of how many separate economic deals are inside the agreement. One member and one deal is the bottom of it. A preferred return, a promote and a departing founder is not.
Reading an existing agreement against these six provisions is usually the first thirty minutes, and thirty minutes is $200. It is the cheapest hour on this page and it is the one that decides whether the rest is needed.
What the S corporation election actually is
It is not an entity. It is a tax classification laid over one, and the entity underneath it keeps every obligation it already had. Most of what goes wrong is a state-law document colliding with a federal tax election nobody told it about.
An LLC, or a corporation, formed under the law of one state
A domestic LLC with two or more members is classified as a partnership by default; with one owner it is disregarded as an entity separate from its owner. Neither default has anything to do with the liability shield, which comes from the state statute and stays where it is.
26 C.F.R. §301.7701-3(b)(1)(i), (ii)Four requirements, and one of them is a drafting question
A small business corporation is a domestic corporation with no more than one hundred shareholders, only eligible shareholders — which excludes partnerships, corporations and non-resident aliens — and one class of stock. Three of the four you can count. The fourth is decided by reading documents, and that is the whole of Part two.
26 U.S.C. §1361(b)(1)(A)–(D) · §1361(c)(1) family aggregationAnd if the entity is an LLC, the form does two jobs at once
An eligible entity that elects to be an S corporation is treated as having elected to be classified as an association — that is, as a corporation for federal tax purposes — without filing a separate Form 8832. One signature, two elections. It is convenient, and it is the reason a lot of owners have no idea their LLC is being taxed as a corporation.
26 C.F.R. §301.7701-3(c)(1)(v)(C) · 26 U.S.C. §1362(a)After the acceptance letter, nothing you filed is doing the work
The election is tested against the governing provisions — the charter, the state statute, and any binding agreement about who gets money out. If those provisions give one member a different right to distributions or to liquidation proceeds, the company was never a small business corporation, or stopped being one on the day the provision took effect.
The form is a moment. The agreement is a standing condition.
26 U.S.C. §1362(d)(2) · 26 C.F.R. §1.1361-1(l)(2)(i)Nothing above is advice about your company and none of it can see your documents. It is the shape of a federal rule, described in general, and whether any of it applies depends on the specific facts.
The one class of stock rule, copied out and glossed
Five sentences decide it. They are short, they are not written for you, and almost nobody selling an S corporation election has put them in front of a client. Left column: the regulation. Right column: what it means when it meets an operating agreement.
The regulation, copied out
26 C.F.R. §1.1361-1(l)(1) and (l)(2)(i) · glossed in the channel“A corporation that has more than one class of stock does not qualify as a small business corporation.”
“… a corporation is treated as having only one class of stock if all outstanding shares of stock of the corporation confer identical rights to distribution and liquidation proceeds.”
“Differences in voting rights among shares of stock of a corporation are disregarded in determining whether a corporation has more than one class of stock.”
“The determination … is made based on the corporate charter, articles of incorporation, bylaws, applicable state law, and binding agreements relating to distribution and liquidation proceeds (collectively, the governing provisions).”
“A commercial contractual agreement, such as a lease, employment agreement, or loan agreement, is not a binding agreement relating to distribution and liquidation proceeds … unless a principal purpose of the agreement is to circumvent the one class of stock requirement.”
On this transcript. The text above is set from 26 C.F.R. §1.1361-1(l)(1) and (l)(2)(i), abridged where marked with an ellipsis and never re-ordered. Every link in the table of authorities goes to a public source you can read against it. [[VERIFY BEFORE LAUNCH — check every quoted word against the current eCFR text, and print the date of that check in this line.]]
Quoted for the shape of the rule and not applied to anyone’s documents. Whether a particular clause confers a different right to proceeds depends on the specific facts of the agreement it sits in, on the rest of that agreement, and on anything else the members signed.
The column between the two halves of this object is the same column that runs down the middle of the office sheet — same width, same two hairline edges, same graduation. There, it is empty for one thousand and thirty days, because nobody is sitting in it. Here, somebody is. That is what outside general counsel is, and it is easier to draw than to say.
Six provisions that decide whether you have one class of stock
The short form of this list is on the homepage and can be ticked. This is the long form: what each provision actually looks like when you open the document, and which way it cuts. Two of the six are expressly fine, and a checker that only ever says no is a fear machine.
A preferred return
§1.1361-1(l)(1)What it looks like“The Class A Members shall receive a cumulative preferred return of eight percent per annum on Unreturned Capital before any distribution to other Members.”
Where it cutsA right to money out that the other members do not hold. On its face this is not identical rights to distribution proceeds, and it is the single most common way an operating agreement written for a real deal collides with an election made for a tax saving.
More than one class or series of units
§1.1361-1(l)(1)What it looks likeClass A and Class B. Common and preferred. Investor Units and Founder Units. A profits interest granted to a key employee.
Where it cutsIf the classes differ only in voting, that is expressly permitted. If they differ in what comes out of the company, or in what happens on a sale, it is a different right to proceeds and the label on the class does not save it.
Different rights on liquidation
§1.1361-1(l)(1)What it looks likeA liquidation preference. A waterfall with more than one tier. “First, to the Members in proportion to Unreturned Capital; second, to the Members in proportion to Percentage Interests.”
Where it cutsThe regulation names liquidation proceeds in the same breath as distribution proceeds. A waterfall that pays somebody first is a different right to liquidation proceeds, and a two-tier waterfall is the ordinary shape of a raise.
Targeted allocations
A §704(b) questionWhat it looks likeAllocation language driven by a hypothetical liquidation at the end of each year, so that capital accounts equal what the waterfall would pay.
Where it cutsThis is a different branch of the law, not a §1361 question, and it is on the list because it is constantly confused with one. Allocations follow the agreement unless they lack substantial economic effect. An S corporation does not allocate at all — it divides pro rata per share, per day — which is exactly why targeted allocation language in an entity that has elected S status is a sign that two documents were written by two people.
A buy-sell at a price other than fair market value
§1.1361-1(l)(2)(iii)(A)What it looks like“Upon a Triggering Event the Company shall purchase the Departing Member’s Units at book value.”
Where it cutsUsually disregarded. Bona fide agreements to redeem or purchase at the time of death, divorce, disability or termination of employment are generally not taken into account. Turns on facts — principally whether it is bona fide and whether a principal purpose is to get around the requirement.
Different voting or management rights, and nothing else
§1361(c)(4)What it looks likeA manager-managed company. Voting and non-voting units. A member who has consent rights over a sale and no other difference at all.
Where it cutsExpressly permitted. Differences in voting rights are disregarded by statute. This is where most of the control a founder actually wants can live without touching the election, and it is worth knowing before the deal is negotiated rather than after.
Six is not all of them, and none of this can see your actual words, any side letter, any subscription agreement or anything else the members signed. Instruments, obligations and arrangements can be treated as a second class of stock on their own terms under 26 C.F.R. §1.1361-1(l)(4), with a straight-debt safe harbour at 26 U.S.C. §1361(c)(5). Whether any of it matters in a particular company depends on the specific facts.
The homepage carries these six as a list you can tick, which rewrites the message it drafts for you by name. Open the short form on the office sheet. Nothing is transmitted from it and nothing is stored.
Thirty minutes reads an agreement against all six. That is the ordinary shape of a first call, and it is the one that decides whether anything else is needed.
Book a consultation $200 · 30 minutes · by videoDoes a single-member LLC need an operating agreement?
Yes — and almost every reason given for it online is the wrong reason. It is not there to settle arguments between members, because there are none. It is there for the four moments when somebody outside the company reads it.
“To avoid disputes between the members”
With one member there is no dispute to avoid, which is why the advice sounds hollow and why so many single-member companies never get one. The state does not require you to have one, and nothing stops the company operating without it.
A Texas company agreement is enforceable even though only one person is party to it — the statute says so directly, precisely because the objection is so obvious.
Tex. Bus. Orgs. Code §101.052 · §101.0523 [[CITE-CHECK — confirm section numbering against the current code before launch]]By a bank, a buyer, a court and the Internal Revenue Service
- A lender or a bank opening the account, who wants to see who may bind the company and will not take your word for it.
- A buyer, or an investor, whose first diligence request is the agreement and whose second is every amendment to it.
- A court, being asked whether the company was ever operated as something separate from you — which is a facts question, and the document is one of the facts.
- The Internal Revenue Service, if you have made any election at all, because the agreement is a governing provision and Part two of this sheet is about what that means.
Texas law is used above because that is where the office is admitted. Company agreements are creatures of state law, and the equivalent statute in your state will be numbered differently and may not say the same thing — which is a question for counsel licensed there, and she will say so rather than guess. The federal classification rules apply the same way everywhere.
The election calendar, and what happens when it is missed
Two dates matter and most people know one of them. The channel down the left of this docket is not drawn to scale, and no gap in it is a claim — the one on the office sheet is, and it says out loud where its scale ends.
For a new entity, the clock starts at the earliest of three things
The first taxable year of a new corporation begins on the earliest date it has shareholders, acquires assets, or begins doing business — not the date on the certificate of formation, which is what most people count from.
26 U.S.C. §1362(b)(4)Two months and fifteen days into the year the election is to take effect
Or at any time during the whole of the preceding year. Filed after that, the election is generally treated as made for the following year instead — which is a full year of paying tax under a classification you did not choose.
26 U.S.C. §1362(b)(1), (b)(3) · Form 2553 instructionsLate election relief, if you can show reasonable cause and consistency
The Service consolidated the late-election relief procedures into one revenue procedure, with time limits and conditions — broadly, that the failure was inadvertent, that reasonable cause exists, and that everyone has been filing consistently with the election having been made. It is a request, not a right.
Rev. Proc. 2013-30 · 26 U.S.C. §1362(b)(5)Inadvertent termination relief, and the narrower door beside it
Where an election was invalid from the start or terminated, and the defect was inadvertent, the Service may treat the corporation as an S corporation for the period — on conditions, with corrective action, and generally by private letter ruling with a user fee of [[PLR USER FEE — verify against the current annual revenue procedure]].
Certain governing-provision defects can now be corrected without a ruling under a later procedure. None of it is quick and none of it is cheap, and whether any of it is available depends on the specific facts.
26 U.S.C. §1362(f) · Rev. Proc. 2022-19The comparison worth holding on to: the filing deadline is a date you can put in a calendar and a bookkeeper can watch. The governing-provision condition is not a date at all — it is a standing state of your documents, tested whenever anybody looks, and nothing on your calendar will ever remind you of it.
Four entity choices, and where each one breaks
Every comparison table published on this subject has two columns: what it buys, what it costs. The third column is the one nobody publishes, and it is the only one that is ever the reason somebody calls.
LLC taxed as a partnership
Default for two or more membersWhat it buysAlmost total freedom in the agreement. Preferred returns, waterfalls, promotes, targeted allocations, members who are entities. Basis includes a share of company debt, which matters a great deal in real estate.
Where it breaksThe whole distributive share is generally subject to self-employment tax for members who are not passive, and the rules on that are genuinely unsettled. No payroll-tax split, and the freedom that makes the agreement easy to write makes it easy to write badly.
LLC that elects S corporation status
Form 2553, plus a deemed association electionWhat it buysA defensible split between salary and distribution, and therefore a payroll-tax outcome the partnership route does not offer. Keeps the state-law LLC and its flexibility of management.
Where it breaksRight here, in the agreement it inherited. One class of stock, eligible shareholders only, pro rata allocation per share per day, and no debt in basis. An LLC agreement written for a partnership almost never survives contact with §1361 unchanged.
Corporation that elects S corporation status
The original shape of the thingWhat it buysFamiliar corporate machinery, a stock ledger a buyer recognises, bylaws instead of a bespoke agreement, and fewer places for a second class of stock to hide.
Where it breaksCorporate formality is not optional, and the same eligibility limits apply. A venture investor is usually a partnership or a corporation, and either one is an ineligible shareholder, so the first priced round ends the election.
C corporation
No election at allWhat it buysAny capital structure you like, any shareholder, preferred stock that is actually preferred, and the shape institutional investors expect. Qualified small business stock is a C corporation question and only a C corporation question.
Where it breaksTwo layers of tax on money taken out, and a decision that is far easier to make than to unmake. Converting back has consequences that arrive years later, which is the general problem this whole site is about.
This is a description of four structures, not a recommendation of any of them, and the right answer changes with what you sell, who owns it, whether there is debt, whether anyone will ever buy it and what your state does. It depends on the specific facts. Nothing on this page is legal advice and nothing on it is a tax opinion.
Questions owners ask first
Nine of them, including the one about why there is not a single 2026 dollar figure on this website when every competitor page is full of them.
Can an LLC elect to be taxed as an S corporation?
Yes. An eligible entity that files Form 2553 is treated as having also elected to be classified as an association taxable as a corporation, so a separate Form 8832 is not needed. The LLC stays an LLC for every state-law purpose — the shield, the filings, the company agreement.
What changes is that a body of federal rules written for corporations now applies to a document written for a partnership, and the two were rarely drafted by the same person.
26 C.F.R. §301.7701-3(c)(1)(v)(C)What is the deadline for an S corporation election?
No later than two months and fifteen days after the beginning of the tax year the election is to take effect, or at any time during the preceding tax year. For a brand new entity, the year begins on the earliest date it has shareholders, acquires assets or begins doing business — not the formation date.
Filed later than that, the election generally takes effect for the following year instead, unless late-election relief is granted.
26 U.S.C. §1362(b) · Rev. Proc. 2013-30Can a preferred return end my S corporation election?
It can. A preferred return is a right to distribution proceeds that the other members do not hold, and the one class of stock requirement asks whether all outstanding shares confer identical rights to distribution and liquidation proceeds. The operating agreement is one of the governing provisions the determination is made from.
Whether a particular clause does it depends on the specific facts — the whole agreement, anything else the members signed, and what the provision actually does when you follow the money. That reading is a thirty-minute conversation, not a web page.
26 C.F.R. §1.1361-1(l)(1), (l)(2)(i)Does a single-member LLC need an operating agreement?
It is not required to exist, and it is read by a lender, a buyer, a court and the Internal Revenue Service. Part four sets out all four. A Texas company agreement is enforceable even though only one person is party to it.
The day it is worth the most is the day before you admit a second member, because that admission converts a disregarded entity into a partnership and the agreement is the thing that decides what that costs.
Rev. Rul. 99-5 · 26 C.F.R. §301.7701-3(b)(1)(ii)We already filed. Should we have the agreement read anyway?
That is the ordinary reason people call this office. The acceptance letter tells you the form was processed; it does not tell you the governing provisions are consistent with the election, and nothing ever will until somebody looks.
If something is wrong, the routes back exist and are narrow: relief for an inadvertent invalid election or termination, generally by private letter ruling, and a later procedure that lets certain governing-provision defects be corrected without one.
26 U.S.C. §1362(f) · Rev. Proc. 2022-19Why is there no 2026 tax figure anywhere on this site?
Because the whole premise of writing about this now is that the rules changed. The 2025 act made significant permanent changes to how pass-through businesses are taxed, and a page that publishes a threshold or a phase-out figure from memory, and then leaves it there for eighteen months, has discredited every other sentence on it.
So this site names what changed in kind and never prints a number for it. When the figures are verified against the primary source they will be published with the date of the check beside them.
P.L. 119-21Do you do divorce, family law or litigation?
No divorce, no family law and no litigation. It is refused in writing on every sheet of this site rather than discovered four minutes into a paid call. If a matter has been filed, or is about to be, the useful thing this office can do is hand you to somebody who tries cases.
Are you licensed in our state?
She is admitted in Texas. Everything on this sheet about §1361, §1362 and the entity classification rules is federal and applies the same way in every state. Company agreements are state-law creatures, and where the question turns on another state’s statute it goes to counsel licensed there.
[[FEDERAL COURT ADMISSIONS — question B5 came back blank; no list is published until it is answered]]
Is anything on this page legal advice?
No. Information on this site is not legal advice, and use of this website does not create an attorney-client relationship. It is written about federal rules in general and cannot see your documents; what any provision or election does in a real company depends on the specific facts. Do not send confidential information through this site or by email before an engagement is agreed in writing.
Bring the agreement, not the question
The half hour is worth several times more if the document is in front of both of you. Send nothing confidential beforehand — just say what kind of entity it is, roughly what the deal was, and whether an election has been filed. That is enough to book it.
If you would rather send something written and would rather not compose it from nothing, the drafting bench on the homepage assembles the message for you from four typeset choices, and ticking any of the six provisions rewrites it by name. Nothing is transmitted from it and nothing is stored.
Before you write anything: do not send confidential information. Nothing you send before an engagement is agreed in writing is protected as a confidence, and an unsolicited email does not create an attorney-client relationship. The details, and the document, belong on the call.
This website may constitute attorney advertising under the Texas Disciplinary Rules of Professional Conduct. Responsible attorney: Olinda Woodruff. Thirty years in tax as an accountant. A lawyer since 2020. Certified public accountant licensed in Maryland — a Maryland licence, not a Texas one. [[TEXAS ADVERTISING — confirm the permitted wording for stating the CPA designation before launch]]