S-Corporation Election Package (Form 2553 + State S-Election) — North Dakota

S-CORPORATION ELECTION PACKAGE (FORM 2553 + NORTH DAKOTA STATE OVERLAY)

OVERVIEW

An S corporation is not a separate kind of entity. It is a federal tax classification, under Subchapter S of the Internal Revenue Code, available to a qualifying corporation or LLC that timely files IRS Form 2553. When the election is in effect, the entity generally pays no federal income tax; instead, items of income, loss, deduction, and credit pass through to the shareholders, who report them on their personal returns. This avoids the "double taxation" of a C corporation.

Why elect S status:

• Pass-through taxation — no entity-level federal income tax (26 U.S.C. § 1363).
• Potential self-employment / payroll tax savings: only a shareholder-employee's reasonable compensation (W-2 wages) is subject to FICA; distributions beyond reasonable compensation are not.
• Limited liability of the underlying corporation or LLC is retained.

Why a North Dakota owner should care about the state overlay:

• North Dakota recognizes the federal S election automatically — there is no separate North Dakota S election form. See Part 5.
• The North Dakota S corporation files Form 60 (S Corporation Income Tax Return) and generally pays no North Dakota entity-level income tax on its pass-through income.
• North Dakota requires 2.5% withholding on a nonresident shareholder's year-end distributive share of North Dakota income, with a composite-return alternative under N.D.C.C. § 57-38-31.1.

Entity / filing fields (complete before filing):

PART 1 — FEDERAL ELIGIBILITY CHECKLIST (IRC § 1361)

Confirm EVERY item below before filing Form 2553. A single failure makes the entity ineligible and any election invalid.

Entity-level requirements

☐ The entity is a domestic corporation or an eligible domestic entity (e.g., an LLC) electing to be treated as a corporation (26 U.S.C. § 1361(b)(1)).
☐ The entity has no more than 100 shareholders (§ 1361(b)(1)(A)). Members of a family (a common ancestor, lineal descendants, and their spouses/former spouses) may be counted as one shareholder under § 1361(c)(1).
☐ The entity has only ONE class of stock (§ 1361(b)(1)(D)). Differences in voting rights alone are permitted; differences in distribution or liquidation rights are not.
☐ The entity is not an ineligible corporation under § 1361(b)(2) (e.g., a financial institution using the reserve method of accounting for bad debts, an insurance company taxed under subchapter L, a possessions-tax-credit corporation, or a current/former DISC).

Shareholder eligibility (§ 1361(b)(1)(B)–(C))

☐ Every shareholder is an eligible shareholder: an individual (U.S. citizen or resident), an estate, a qualifying trust, or a § 401(a) / § 501(c)(3) tax-exempt organization.
☐ No shareholder is a nonresident alien (§ 1361(b)(1)(C)).
☐ No shareholder is a partnership or a corporation.
☐ Any trust shareholder is a permitted trust: a grantor trust, a former-grantor trust (2-year window), a testamentary trust (2-year window), a voting trust, a Qualified Subchapter S Trust (QSST) (§ 1361(d)), or an Electing Small Business Trust (ESBT) (§ 1361(e)).

PART 2 — FEDERAL FORM 2553, LINE BY LINE

Part I — Election Information

Part II — Selection of Fiscal Tax Year

Complete only if the entity wants a tax year other than the required year (generally the calendar year). State the business-purpose basis (e.g., § 444 election, natural business year under Rev. Proc. 2006-46, or ownership tax year).

Part III — QSST Election

A Qualified Subchapter S Trust beneficiary uses Part III (or a separate statement under § 1361(d)(2)) to elect QSST treatment so the trust qualifies as an eligible shareholder.

Part IV — Late Corporate Classification Election Representations

Used when the entity also seeks late S-election relief (and, for an LLC, a deemed entity classification election). See timing and relief below.

Timing of the election (26 U.S.C. § 1362(b))

• Timely election: file by the 15th day of the 3rd month of the tax year the election is to take effect, or at any time during the immediately preceding tax year.
• New entities: the first tax year begins on the earliest of when the corporation has shareholders, acquires assets, or begins doing business; file within 2 months and 15 days of that date.
• Late-election relief — Rev. Proc. 2013-30: if the deadline is missed, relief is generally available if (1) the entity intended to be an S corp as of the intended effective date, (2) the only reason it is not an S corp is the missed/defective filing, (3) there is reasonable cause and the entity acted diligently, and (4) the relief request is filed within 3 years and 75 days of the intended effective date. Write "FILED PURSUANT TO REV. PROC. 2013-30" across the top of Form 2553 and attach a reasonable-cause statement signed by all shareholders.

Filing method

Form 2553 is filed by mail or fax to the IRS service center designated in the current instructions for the entity's state. Electronic filing of a standalone Form 2553 is not generally available; it may be attached to a timely filed Form 1120-S for certain late elections. Retain the IRS acceptance notice (CP261) permanently.

PART 3 — SHAREHOLDER CONSENT STATEMENT (ALL SHAREHOLDERS MUST CONSENT)

Every shareholder on the effective date (and, for a preceding-year election, those who held stock during that prior period) must consent. Reproduce and attach extra rows as needed.

By signing, each shareholder consents to the S corporation election under 26 U.S.C. § 1362(a) and represents that the information provided is true and correct.

PART 4 — ENTITY INTERPLAY (LLC ELECTING S STATUS)

An LLC is, by default, a disregarded entity (single member) or a partnership (multi-member). To be taxed as an S corporation it must first be classified as an association taxable as a corporation.

• A single Form 2553, filed on time, lets an eligible LLC elect S status without separately filing Form 8832 (Entity Classification Election). A timely, properly completed Form 2553 is treated as a deemed Form 8832 corporate-classification election effective on the same date (Treas. Reg. § 301.7701-3(c)(1)(v)(C)).
• If the LLC wants corporate (C) classification effective on a different date than the S election, file Form 8832 separately.
• Confirm the LLC operating agreement does not create a second class of stock (e.g., disproportionate distribution/liquidation rights or preferred returns), which would void S eligibility.

PART 5 — NORTH DAKOTA STATE S-CORP OVERLAY

Recognition rule — AUTOMATIC (no separate North Dakota election)

North Dakota automatically recognizes the federal S election. There is no separate North Dakota S-corporation election form. A corporation that elects to be taxed as a Subchapter S corporation for federal income tax purposes is taxed in the same manner for North Dakota income tax purposes (N.D.C.C. ch. 57-38). An LLC taxed like an S corporation federally is treated the same way for North Dakota purposes. The entity's income passes through to the shareholders, who report it on their North Dakota individual returns.

Return / form

• The North Dakota S corporation files Form 60 — S Corporation Income Tax Return.
• A subchapter S corporation that carries on business or derives gross income from sources in North Dakota must file Form 60 by April 15 (calendar-year filers); a federal extension carries to North Dakota.
• Form 60 also reports income/loss to every nonresident individual, estate, or trust shareholder (and to QSST/ESBT shareholders with a nonresident individual or estate beneficiary).
• Estimated payments are not required of S corporations, but if a tax is due an estimated payment may be made (Form 60-ES); an extension payment may be made on Form 60-EXT.

Entity-level income tax

• Generally no entity-level North Dakota income tax on the S corporation's pass-through income; income flows to shareholders and is taxed at North Dakota's graduated individual rates.
• Built-in gains and excess net passive income that are taxed federally at the corporate level may correspondingly be taxed at the North Dakota corporate level because North Dakota follows the federal treatment.
• All income from an S corporation's activity is business income subject to apportionment; North Dakota does not allow separate accounting (N.D. Admin. Code § 81-03-09).

Nonresident shareholders — withholding and composite return

• Withholding: an S corporation must withhold North Dakota income tax at 2.5% from the year-end distributive share of North Dakota income of a nonresident member (shareholder).
• Composite return (N.D.C.C. § 57-38-31.1): a passthrough entity may file a composite income tax return on behalf of electing nonresident members, reporting and paying tax at the highest marginal rate under N.D.C.C. § 57-38-30.3 on the members' pro rata or distributive shares of North Dakota-source income. A nonresident member whose only North Dakota income is from one or more passthrough entities may elect to be included; a member included in a composite return who later files an individual return receives credit for tax paid on the member's behalf.

Other North Dakota items to confirm

☐ Maintain good standing with the North Dakota Secretary of State (corporations and LLCs file annual reports).
☐ Register for North Dakota sales and use tax if selling taxable goods/services (economic-nexus thresholds apply to remote sellers).
☐ Register for North Dakota income-tax withholding and unemployment insurance before paying shareholder-employee wages.

PART 6 — POST-ELECTION COMPLIANCE

☐ Reasonable compensation. A shareholder who performs services must be paid reasonable compensation as W-2 wages before taking distributions; the IRS may recharacterize disguised wages and assess back FICA, penalties, and interest.
☐ Payroll setup. Run payroll, withhold and deposit federal and North Dakota income tax and FICA, and file Forms 941/940 and North Dakota withholding returns.
☐ Distributions. Distributions to shareholders are generally tax-free to the extent of stock basis and the accumulated adjustments account (AAA); track basis carefully (§ 1367).
☐ Built-in gains tax (§ 1374). If the entity converted from C-corporation status, gain on pre-conversion appreciated assets sold within the 5-year recognition period is taxed at the entity level (and correspondingly for North Dakota).
☐ Passive investment income (§ 1375). If the entity has accumulated C-corporation earnings and profits and passive investment income exceeds 25% of gross receipts, an entity-level tax applies; exceeding 25% for 3 consecutive years terminates the S election (§ 1362(d)(3)).
☐ One class of stock maintained. Avoid side agreements, disproportionate distributions, or debt that could be reclassified as a second class of stock.
☐ Annual federal/state returns. File Form 1120-S with Schedules K-1 federally and North Dakota Form 60 with the North Dakota shareholder schedules.
☐ Nonresident withholding / composite. Withhold 2.5% on nonresident shareholders' distributive shares, or file a composite return under § 57-38-31.1.
☐ Recordkeeping. Retain Form 2553, the CP261 acceptance notice, shareholder consents, stock/ownership records, and minutes permanently.

PART 7 — REVOCATION / TERMINATION (26 U.S.C. § 1362(d))

Voluntary revocation (§ 1362(d)(1))

☐ Shareholders holding more than 50% of the outstanding shares (voting and nonvoting) must consent.
☐ File a revocation statement with the IRS (no official form; a signed letter identifying the entity, EIN, and effective date, with shareholder consents).
☐ Effective date: if filed by the 15th day of the 3rd month of the tax year, it is effective the first day of that year; otherwise the first day of the following tax year. A prospective date may be specified.

Automatic termination (§ 1362(d)(2)–(3))

Termination is automatic if:
☐ The entity ceases to qualify as a small business corporation (e.g., exceeds 100 shareholders, an ineligible shareholder acquires stock, or a second class of stock is created) — effective on the date of the disqualifying event.
☐ The entity has C-corporation E&P and passive investment income exceeds 25% of gross receipts for 3 consecutive tax years — terminating at the start of the next year.

Five-year re-election bar (§ 1362(g))

After revocation or termination, the entity generally may not re-elect S status for 5 tax years without IRS consent.

North Dakota effect

Because North Dakota follows the federal classification, a federal revocation/termination ends North Dakota S treatment for the same period; the entity then files as a C corporation on North Dakota Form 40 (Corporation Income Tax Return).

SIGNATURE BLOCK

Authorized Officer

Signature: _________________________________________
Name: [________________________________]
Title: [________________________________]
Date: [__/__/____]

SOURCES AND REFERENCES

• 26 U.S.C. §§ 1361–1368, 1374, 1375 (Subchapter S)
• 26 U.S.C. § 1362 (election, revocation, termination)
• IRS Form 2553 and Instructions; IRS Notice CP261
• Rev. Proc. 2013-30 (late election relief); Treas. Reg. § 1.1362-6; Treas. Reg. § 301.7701-3 (entity classification)
• N.D.C.C. ch. 57-38 (North Dakota income tax) — https://ndlegis.gov/cencode/t57c38.pdf
• N.D.C.C. § 57-38-31.1 (composite returns of passthrough entities) — https://codes.findlaw.com/nd/title-57-taxation/nd-cent-code-sect-57-38-31-1/
• North Dakota Office of State Tax Commissioner — S Corp and Partnership Tax; Form 60 and Instructions — https://www.tax.nd.gov/business/s-corp-and-partnership-tax