How Do You Change from a LLC to S Corporation

An LLC or a limited liability company is one of the recognized forms or entities for conducting business in the United States of America. Such companies contain features of a corporation and also of a partnership as defined under the laws.

Now, an S corporation is one that is validly allowed to choose to be taxed under a particular chapter, Chapter S of the Internal Revenue Code under US laws. In this way, an S corporation can legally avoid a process of double taxation, once to itself and once to its shareholders. Normally speaking, an S corporation need not pay federal income taxes. However, certain taxes such as those on capital gains and passive income do need to be paid; also payable are excise taxes and employment taxes.

In the US, typically, companies and corporations are incorporated under State laws while taxation is governed under federal laws. Provisions of the federal tax laws sometimes require that the entity choosing to be treated as an S corporation must be incorporated under particular State laws only.

Check to see if your entity is eligible to be treated as an S corporation. Some of the conditions include that the entity is either a limited liability company or a domestic corporation. The number of shareholders should be below one hundred, they should be US citizens only, or if aliens, they should be valid residents in the USA. All the shareholders must hold only one class of stock. There may be other conditions applicable from time to time, such as the nature of the shareholders - individuals and not corporate or artificial entities, though some corporations such as a 501(c) 3 are permitted to hold shares in an S corporation. The financial year ending of an S corporation must be on the thirty-first of December.

Once it is confirmed that your entity is eligible to file tax returns under the S corporation status, do ascertain the appropriate tax-forms to be filed. These forms are to be filed by the shareholders, though there may be forms to be filed by the S corporation for taxes applicable to it.  Check to see if you are inside the time-limit within which the entity should choose to be an S corporation.

Do note that at any point of time, if any of the conditions for being eligible as an S corporation cease to be met, your entity will stop being treated as one and will revert to its original status of an LLC.

Tax matters are very important and should not be taken lightly by anyone. To this end, it is highly recommended to seek professional counsel on the merits and demerits of choosing to be an S corporation prior to making such choice. This could impact the tax submission of a huge number of your shareholders as well. You can also contact the relevant office of the Internal Revenue Service to ascertain eligibility.


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