Making Changes: C-Corp to LLC and LLC to S-Corp
Filed Under: Close Corporation, Delaware, INC Knowledge, Limited Liability Company, Q&A, S-Corporation
Tags: C-Corporation, Delaware, Limited Liability Company, S-Corporation
The two questions below are from clients and they illustrate the power of the LLC. One client wants to change his C-corp to an LLC. He must file a conversion with the State of Delaware and then notify the IRS. The other wants to change his LLC to be taxed like an S-corp. He doesn’t need to change his company filing with the State of Delaware. He simply files two forms with the IRS electing S-corporation tax status, and remains an LLC in structure.
Mitch’s Question:
I currently have a C-corp with HBS. There are only 1,000 shares of stock and I own them all. No employees and my wife is the corp. secretary. Can I convert my C-corp into an LLC? Can Harvard do it? Is it easy to do? Cost? Do I need to change the name? I assume I need to revise the Fed. EIN.
Thanks,
Mitch
Maryland
Answer: Mitch, if you have a Delaware C-corp we can easily convert it to an LLC for you, officially, with the State of Delaware and the IRS. The filing is called a “conversion”. Our service includes all document preparation, filing, Delaware filing fees, a new LLC minute book with seal and membership certificates and filing the IRS notice. Even includes shipping! The “ending” of your company name will change to LLC. Call for a quote.
Tyrone’s Question:
I formed an LLC with HBS and now my accountant wants me to be an S-corp. Can I do this? Can Harvard do this for me?
Let me know.
Tyrone
Colorado
Answer: Tyrone, the federal government does not recognize the LLC as an entity for tax purposes; therefore LLCs have the opportunity to elect their desired tax classification. By default, a single member LLC is classified as a “disregarded entity” or the LLC is ignored for the purpose of filing a federal tax return. Multiple member LLCs will be considered partnerships for filing purposes by default. Bear in mind, these designations are for federal tax purpose and do not change the fact the business is a Limited Liability Company. An LLC not accepting its default status must file Form 8832 to elect the entity’s classification. This form allows an LLC to be recognized as a corporation for the purposes of filing taxes. Once an LLC files form 8832 with the IRS and elects to be recognized as a corporation, it becomes eligible to file Form 2553 and elect sub-chapter S tax status. Ideally, an LLC seeking S-corp status will file Form 8832 and Form 2553 with the IRS, simultaneously.
If you have questions about CHANGING your company from one entity type to another, or electing different tax status, give us a call or drop us an email. We can’t advise you on what to do, but we can help you change from one form of entity to another, if you want to.
Hi we have a corporation of which you handle our work Western Realty Corp. I like your weekly blog.
I am a tax lawyer and noticed your answer to the question about converting a corporation to an LLC which as you say can be done through a simple conversion statute. However, this conversion is a ” deemed liquidation” for tax purposes and results in a tax at both the corporation level and at the shareholder level. The corporation is treated as if it sold all its assets at fair market value and is taxed accordingly. Then the shareholders are treated as if they received the deemed proceeds of the corporate deeded sale and are taxed on their individual returns. This can be a disaster if the corporation has significant assets. Just trying to help avoid a blindside for your readers.
Roland Freasier, Esq
Roland,
Great comment and certainly relevant anyone considering changing from one company type to another. Keep reading the blog, and keep commenting. Another case where open communications and client comments greatly enhances the knowledge of the reader.
Rick Bell
Chairman & CEO
I have a question regarding changing a c-corp into an LLC. We have a realty company that is a c-corp. with no tangible assets or liabilities. Currently it has only one shareholder. I want to become a majority partner, change the name of the company and change the C-corp to a LLC. My reasoning is that this is an old established company (30 years history)that I want hold onto for marketing and qualification purposes instead of forming a new LLC with no prior history. The liquidation tax question is not clear to me. No assets no tax, right? Your thoughts would be appreciated.
Thanks for the info on the proper forms to use to switch the LLC to the SCORP. For tax purposes this change will save me a lot of money. What about the dates? Can I back date this for last year, or is this only during my calendar year as far as setting this up?
Hi Mike,
Here is the answer to your question. An election specifying an entity’s classification for federal tax
purposes can take effect no more than 75 days prior to the date the election is filed, nor can it take effect later than 12 months after the date on which the election is filed. If line 8 shows a date more than 75 days prior to the date on which the election is filed, the election will default to75 days before the date it is filed. If line 8 shows an effective date more than 12 months from the filing date, the election will take effect 12 months after the date the election is filed.
When our LLc was set up form 2553 was completed so per the IRS we are an S Corp. We want to change this back to a Single Member LLC. How can we do this.
When setting up an LLC up as an S-Corp, typically form 8832 – Entity Classification needs to be filed with form 2553. Form 8832 is the same form that needs to be filed when “reclassifying” an LLC back to a Single Member LLC. If you need assistance filing Form 8832, we suggest that you seek the services of a tax professional.