How to Start an S Corp in New Mexico: LLC and Tax Election Guide
Updated: Sep 4
For many Albuquerque small-business owners, an LLC taxed as an S corporation can be a useful structure. But the terminology matters: an S corporation is generally a federal tax classification, not a type of New Mexico business entity.
A business can organize under New Mexico law as an LLC or corporation and, if it qualifies, elect S corporation tax treatment with the IRS. An LLC that makes the election remains an LLC under New Mexico law.
LLC or Corporation Under New Mexico Law?
A New Mexico LLC is formed by filing Articles of Organization with the New Mexico Secretary of State. The statutory filing fee is $50. LLCs are generally governed through their members, managers, and operating agreement.
A New Mexico corporation is formed by filing Articles of Incorporation. Corporations have shares and operate under a more traditional structure involving shareholders, directors, officers, bylaws, and corporate formalities. The minimum filing fee for a New Mexico for-profit corporation is $100.
Either structure can potentially qualify for S corporation taxation. For many closely held businesses, an LLC offers simpler state-law governance while preserving the option to make an S election.
New Mexico business filings are now submitted through the Secretary of State's online filing system rather than by paper.
Step 1: Form the Business
For an LLC, file Articles of Organization with the New Mexico Secretary of State and designate the required registered agent and registered office.
The LLC should also have an operating agreement addressing ownership, management, distributions, transfers, and other internal rules. If S corporation treatment is contemplated, the operating agreement should be reviewed for provisions that could conflict with the federal requirement that an S corporation have only one class of stock or economic ownership.
Businesses operating in New Mexico may also need to register with the New Mexico Taxation and Revenue Department and obtain a New Mexico Business Tax Identification Number, particularly when gross receipts tax or wage withholding applies.
Step 2: Obtain an EIN
After the entity is formed, obtain an Employer Identification Number from the IRS. The IRS currently allows eligible domestic businesses to obtain an EIN online at no charge.
The EIN identifies the business for federal tax filings, payroll, banking, and other purposes.
Step 3: Make the S Corporation Election
An eligible LLC can elect S corporation taxation by filing IRS Form 2553, Election by a Small
Business Corporation.
A separate Form 8832 generally is not required. A qualifying LLC that timely files Form 2553 is treated as having elected corporate classification as part of the S corporation election.
Form 2553 generally must be filed no later than two months and 15 days after the beginning of the tax year for which the election is to take effect. For an established calendar-year business seeking S status beginning January 1, that normally means March 15. A newly formed business calculates the deadline from the beginning of its first tax year.
The required owners must consent to the election. Form 2553 is generally submitted to the IRS by mail or fax using the current filing instructions.
What If Form 2553 Is Late?
A missed deadline does not necessarily end the matter. IRS Revenue Procedure 2013-30 provides streamlined late-election relief in many cases.
Among other requirements, the business generally must have intended to be an S corporation, otherwise have been eligible, have reasonable cause for filing late, and have reported consistently with the intended S election. The ordinary relief period generally extends to three years and 75 days after the requested effective date, although additional rules and exceptions apply.
Late elections should be reviewed with a tax professional rather than simply backdating a Form 2553.
Who Can Qualify for S Corporation Status?
Federal law imposes important restrictions. An S corporation generally must be domestic, have no more than 100 shareholders, have only eligible shareholders, and have only one class of stock.
Individuals, certain estates, and certain trusts can qualify as shareholders. Partnerships, corporations, and nonresident aliens generally cannot.
The one-class-of-stock rule is especially important for LLCs. An LLC operating agreement that gives different owners different rights to distributions or liquidation proceeds can create S corporation eligibility problems, even though differences in voting rights generally are permitted.
Salary Versus Distributions
This is where much of the potential tax benefit—and much of the risk—arises.
A shareholder who performs substantial services for an S corporation generally must receive reasonable compensation as wages before taking non-wage distributions. Those wages are subject to payroll taxes.
There is no IRS-approved 50/50 rule, 60/40 rule, or other automatic salary-to-distribution ratio.
Reasonable compensation depends on the facts, including the shareholder's duties, experience, hours, responsibilities, comparable market compensation, and the extent to which the company's revenue results from that shareholder's personal services.
After reasonable wages are paid, additional amounts may potentially be distributed without Social Security and Medicare taxes applying to those distributions. That does not mean the distributions are automatically free of income tax. S corporation shareholders generally report their share of the corporation's taxable income whether or not all of that income is actually distributed, and distributions can have additional tax consequences depending on basis and other circumstances.
The IRS can reclassify purported distributions as wages when compensation is unreasonably low.
Payroll Responsibilities
Once an owner becomes a shareholder-employee receiving wages, the business becomes an employer for payroll purposes.
That generally means running payroll, withholding federal and New Mexico income taxes, paying Social Security and Medicare taxes, complying with federal unemployment-tax requirements where applicable, issuing Forms W-2, and filing the required federal employment-tax returns.
New Mexico employers must also comply with state wage-withholding requirements and, when applicable, register and report through the New Mexico unemployment-insurance system.
These additional accounting and payroll costs should be included when deciding whether an S election actually saves money.
New Mexico Tax Consequences
Federal S corporation status does not eliminate New Mexico tax obligations.
An LLC taxed federally as an S corporation and doing business in New Mexico generally files the New Mexico S-Corp, Sub-Chapter S Corporate Income and Franchise Tax Return. New Mexico currently imposes a $50 annual franchise tax on entities taxed as S corporations that are subject to the state's franchise-tax rules.
New Mexico also has rules governing pass-through income, withholding for nonresident owners, and an annual election under which qualifying pass-through entities can pay certain New Mexico income tax at the entity level.
Gross receipts tax is separate. An S corporation election does not eliminate New Mexico gross receipts tax or the registration and reporting obligations associated with it.
Because the interaction between federal S corporation treatment, New Mexico personal income tax, pass-through withholding, and the state's entity-level tax election depends heavily on the owners and the business, this portion of the analysis should be coordinated with a CPA or other tax professional.
When Does an S Corporation Election Make Sense?
There is no universal profit level at which a business should elect S corporation status.
The election becomes worth analyzing when a business has stable profit materially greater than the reasonable compensation that must be paid to the working owner. The potential employment-tax savings on the remaining profit can then be compared against payroll costs, additional bookkeeping, tax-return preparation, the New Mexico franchise tax, and other compliance expenses.
If virtually all of the business's profit represents reasonable compensation for the owner's personal work, there may be little employment-tax benefit.
When Might an S Corporation Be a Poor Fit?
S corporation taxation may be unattractive for a business with low or unpredictable profits, a business whose earnings largely result from the owner's personal services, or a company that expects to bring in investors who are not eligible S corporation shareholders.
It can also be a poor fit when owners need different economic rights, special allocations, preferred returns, or other flexible ownership arrangements inconsistent with the one-class-of-stock requirement.
The additional payroll, bookkeeping, tax-return, and compliance obligations also mean that an S election should not be made simply because someone has heard that “S corps save taxes.”
The Bottom Line
For the right Albuquerque business, an LLC with an S corporation election can combine the flexibility of a New Mexico LLC with potentially favorable federal employment-tax treatment.
But the tax savings depend largely on one question: after paying the working owners reasonable compensation, is enough business profit left to justify the additional cost and complexity?
That calculation should be made before filing Form 2553. Entity formation and operating-agreement issues can be handled with business counsel, while salary levels, payroll, projected tax savings, and the New Mexico tax consequences should be coordinated with a CPA or qualified tax adviser.
REFERENCES
Internal Revenue Service, S Corporations and Instructions for Form 2553.
Internal Revenue Service, S Corporation Employees, Shareholders and Corporate Officers and S Corporation Compensation and Medical Insurance Issues.
Internal Revenue Service, Employer Identification Number and Publication 15, Employer's Tax Guide.
Internal Revenue Service, Late Election Relief; Rev. Proc. 2013-30.
New Mexico Secretary of State, Business Services; NMSA 1978 §§ 53-19-7, 53-19-8 and 53-19-63.
New Mexico Taxation and Revenue Department, Corporate Income and Franchise Tax and Pass-Through Entity.
New Mexico Taxation and Revenue Department, Who Must Register a Business, Gross Receipts Tax Overview, and Withholding Tax and Workers Compensation.
New Mexico Department of Workforce Solutions, Unemployment Insurance.
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