Subchapter S corporations (S Corporations) have grown in popularity in recent years, largely due to their unique tax structure and the perception of enhanced liability protections for owners. It is also relatively simple for a business to make elect Subchapter S status (S Election)—it can be accomplished easily by filing Form 2553, Election by a Small Business Corporation, with the IRS. Often, owners of an entity initially formed as an LLC decide after a few years of operations that they would be better served as an S Corporation, given either the prospect of additional investors, or purely for tax planning and structuring purposes. After filing the Form 2553, no further action is needed other than the transition to an 1120-S year-end filing, and the business owner considers the matter closed.

What business owners often fail to realize is that the initial S Election kicks off a litany of compliance obligations that S Corporations must continually observe, supplemented by volumes of Treasury Regulations and Revenue Rulings interpreting and, in several instances, expanding these compliance rules. Many of the rules are clear, while others are incredibly arcane. For instance, it is clear from the Internal Revenue Code that S Corporations may have only one class of stock. It isn't abundantly clear that in certain instances a simple entity-level loan between the S Corporation and a third-party individual, with loan terms that don't evidence typical indicia of debt, can be viewed by the IRS as a distribution based upon a deemed second class of stock in violation of the single class of stock requirement. Point being, there are many technical traps for the unwary which can cause an S Election termination. In some instances, a business owner might intend to terminate the S Election, and upon affirmatively deciding that S Corporation status is no longer desirable for his or her enterprise, file a "revocation". In either instance, the business owner will anticipate a reversion back to the prior LLC form either a disregarded entity in the case of a single member LLC, or a partnership in the case of a multimember LLC).