Why convert your tax status from a S-Corp to a C-Corp?
A person may consider converting their LLCs tax status from a S-Corp to a C-Corp for many reasons. Businesses may consider converting their LLC tax status if they are earning a greater amount than previous years and expect their earnings to continue to trend upwards. Although S-Corp taxation provides excellent incentives for small businesses, those seeking to expand will be restricted from doing so. For instance, S-Corps cannot have more than 100 shareholders and do not permit foreign owners or investors. Additionally stock interests are restricted to a single class.
Unlike S-Corps, C-Corps are unencumbered by restrictions on how many shareholders a business may have. Additionally, C-Corps may offer multiple classes of stocks and provide more flexible and numerous potential entity structures for investors.
How Can I Change my LLC tax election from a S-Corp to A C-Corp?
Converting your S-Corp to a C-Corp is a fairly simple process. There are a few ways to convert your LLC tax status. First, you may simply take no action and wait for the IRS to terminate your S-Corp tax election for you. The IRS may do this if you violate any of the restrictions that are in place for a S-Corp election, including violations for exceeding the one-hundred shareholder maximum or bringing in foreign owners.
Alternatively, you may take matters into your own hands and terminate your S-Corp tax election yourself. First, a business considering changing its tax election should consult its shareholders. A resolution with a majority vote in favor of the business’ conversion is required to move forward.
Next, a business should prepare a statement of revocation to send to the IRS. This statement is typically devised in a letter format and must include the business’ Employer Identification Number (EIN) for the corporation, the corporation’s address, the number of corporate shares, and the shareholder’s resolution used to approve the conversion. Additionally, the letter should inform the IRS that the corporation seeks to revoke its S-Corp status and wishes to revert to C-Corp status. In order to have the conversion take effect on the first day of the next taxable year, a corporation should submit its letter of revocation by March 15.
Finally, the corporation should file its taxes the following year using the appropriate forms. Rather than using Form 1120-S, the corporation should file Form 1120 in order to file under C-Corp status. A corporation should keep in mind that if the conversion is made in the middle of the year, a short year S-corp tax return is required for the first part of the year and a short-year C-Corp tax return is required for the second part of the year.
If you would like to learn more about converting your corporation’s tax status, do not hesitate to contact one of our experienced business attorneys at EPGD Business Law.
