How to Convert an LLC to a Sub S-Corp

A Subchapter S-Corporation is a corporation that has elected to be taxed under Subchapter S of the Internal Revenue Code. It allows the corporation's net profits or net losses to be distributed to stockholders, which are then passed directly through to their personal income tax returns. The idea is to avoid the double taxation that is common for C-Corporation taxation. Under the law, you can elect to be taxed as an S-Corp. However, you will need to follow certain legal procedures in order to convert your LLC successfully.

Since you are changing your business entity, your state formality requirements will change as well. This means that your LLC will be subject to ongoing formalities such as holding and properly documenting annual meetings of directors and shareholders. Learn about the Sub S-Corp formality requirements for your state.

Check to see if your LLC is eligible to be treated as an S-Corporation. It must be a domestic corporation with no more than 100 shareholders. The shareholders should be either US citizens or valid U.S. residents. They must also hold only one class of stock. The financial year of an S-Corporation ends on the thirty-first of December, and you must file your corporate taxes by March 15 of the new tax year. Check your state’s eligibility requirements to see if your LLC qualifies.

Once your LLC qualifies, the shareholders must elect for it to be taxed under Subchapter S-Corp status. The election must be filed with the IRS on or before the 15th day of the third month of the taxable year. For example, if you formed your Sub S-Corp on September 20, you must file the election by November 15. The election must be signed by all stockholders. The form that you will need for the election is Form 2553 of the Internal Revenue Code.

Once your LLC meets its eligibility requirements for Sub S-Corp status, you must file the appropriate tax returns annually. These forms are to be filed by the shareholders. The forms that you will need are listed below. However, you should keep in mind that this is only a partial list. Also, some of the forms may not even be needed.
Form 1120S: Income Tax Return for S Corporation
1120S K-1: Shareholder's Share of Income, Credit, Deductions
Form 4625 Depreciation
Employment Tax Forms
Form 1040: Individual Income Tax Return
Schedule E: Supplemental Income and Loss
Schedule SE: Self-Employment Tax
Form 1040-ES: Estimated Tax for Individuals

To change your LLC classification, you must file Form 8832 of the Internal Revenue Code. However, you should not file Form 8832 if your LLC will be using its default classification. If you do not plan to change your LLC's classification, avoid the 8832 form altogether and just file the 2553 form. You can find the form on the IRS website for more information on changing an LLC classification.

Corporate tax issues are a serious business, and should therefore be treated in such a manner. To assure that you file your corporate taxes correctly, it is absolutely imperative that you consult with a highly trained and experienced professional. This tax expert can either be a certified public accountant or a tax attorney. In either case, they must be knowledgeable on this subject, and be fully aware of any changes in corporate taxation.