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.
When converting to a LLC from a true S Corp, do you keep the same EIN number?
PS. We are located in PA and have been told that we cannot convert back to a LLC with a S election from a S-Corp.
In short, I have an existing LLC sole proprietor. I am taking over another company that is a S Corp. I want it to be a LLC s election. But I’m told this cannot be done. If your services address this. Please let me know who to contact.
Ettore,
Your situation matches Mitch’s question from my original post, in that you are trying to change the entity type rather than the tax status. As Roland Freasier warns, this could lead to a complicated mess when it comes to liquidation. However, in order to convert any entity, the State where the corporation is formed must have a conversion statute which in your case it appears Pennsylvania does not. Based on that, it seems that there is some truth to what you have been told, and you will not be able to convert the entity from a corporation to an LLC, regardless of the tax status you desire.
This site is a great resource as I learned alot from others questions!
I have two questions for you:
1) Converting from an S-Corp to and LLC (an allowed ‘conversion’ in Colorado), from what I have read on the internet is that we will need to liquidate our assets at fair market value as they are then contributed as member contributions to the LLC. Will the LLC now have to pay property taxes on these contributed assets?
and
2) Since we are converting to an LLC, and there is an ownership share change (new investor added with smaller apportionment of profit per our operating agreement)…this shift was suppose to happen in Feb/March 2010, but we procrastinated as we didn’t understand the conversion and had little resources at the time to sink into advisors. Is it better to just convert now (end of November) or wait until the end of December? (the new investor did give us cash to purchase 9% of shares in the new corporation and will be buying 10% of shares at the end of each year).
Thanks!
What if a s-corp purchased all the stock of a c-corp and then liquidated the c-corp into the s-corp. Would that be the same as electing s-corp status for the c-corp.
Charles,
Remember, the S-Corp is simply a tax status granted by the IRS when the proper election made by a C-Corp. If all you are trying to do is change the tax status of the C-Corp to the S-Corp, all you need to do is make the Subchapter S election for the existing C-Corp by filing form 2553. If the corporation satisfies the requirements for S-Corp status, then that’s all there is to it.
I have C-corp that I formed using rollover money from a qualified IRA. I did this in order to avoid taxes and penalties. While I realize this isn’t the ideal way to fund a business, it worked in my situation. Now, I wanted to know if I have any options to convert my corporation to a LLC or S-corp. Or, what if I start a new company (an LLC for instance) and sell my C-corp to my new company. Any ideas?
Steve, your timing could not have been any better if your C-corp’s fiscal year follows the calendar year. Right now until March 15, you have the option to convert the existing C-corp to an S-corp by filing form 2553 with the IRS. The reason the timing is key is that the IRS will only allow the election during the follow two time frames, (1) no more than two months and 15 days after the beginning of the tax year the election is to take effect, or (2) at any time during the tax year preceding the tax year it is to take effect. If your corporation is not eligible right now, you could still file form 2553 and be granted the S-corp status at the afforded time respective to your corporation’s fiscal year.
As to whether you have the option to go LLC…….well, you may want to speak to a tax professional first. You may have noticed that Roland Freasier, a tax attorney and first to respond to this post, warns that from a tax stand point converting a corporation to an LLC “can be a disaster if the corporation has significant assets”.
Paul, thanks for the answer. My fiscal year ends in November. The company is a very small vending machine operation, so I doubt I have “significant assets!”
My biggest concern is whether or not this conversion is even legal, given the way the corporation was set up. Also, the C – Corp was only recently formed – Dec. 2010.
Thanks,
Steve
HI
My question is, can I convert LLC multimember to S-Corporation for 2010, by simply filing 2010 tax return 1120-S,and 2553 form.
Thanks
Raheel
Raheel, though you may change the tax status of your multi-member LLC to that of an S-corp by filing Forms 2553 and 8832 simultaneously, you may not do it for 2010. As a matter of fact, you have already missed the deadline for making the election in 2011, as the applicable filing period for any calendar year is the first 75 days of the calendar year. If you were to file the forms (2553 and 8832) for S-corp status now, the IRS will not grant the status until 2012.
Hello…my questions are in regards to the conversion from an S Corp to a single member LLC. What are the tax return filing requirements if such a conversion occurred in early 2011? In California, a single member LLC has to file Form 568 with the state and pay a minimum franchise tax of $800. Does this mean that there is a 2011 short period “final” corporate return (with $800 due) along with a 2011 short period Form 568 (with $800 due)? Since the conversion did not occur until 2011, does this mean that a “final” corp return can’t be filed for 2010…thus saving the client an additional $800? Also…as asked above…does the new LLC retain the corp’s EIN?
I appreciate any help. Thank you.
Jonathan
Hi Jonathan. It appears as though the S corp could have filed a “final” return for 2010, even though the actual conversion filing did not take place until early 2011. However, the definition of a “timely” final return in California is due on or before the 15th day of the 3rd full month after the month during which the S corporation withdrew or stops doing business in California. At this point it appears as though you have no choice but to file a 2011 short period final S Corp return, and a 2011 short period Form 568 for the newly formed LLC.
As for the EIN, the IRS says yes you do keep your EIN, but nonetheless, you are still required to make a filing to change the classification of your entity from S Corp to LLC. To keep the EIN you will need to file Form 8832 – Entity Classification Election, to change the way the entity is taxed.
Paul…Thank you very much for the response. I have a few follow-up questions which are all related: (1) Is the 8832 a necessary step despite the conversion from S Corp to LLC? (2)Is the 8832 only necessary if you want to keep the same EIN? (3)Since the new entity is a single member LLC and thus disregarded for federal purposes, an EIN isn’t really necessary (except for payroll tax purposes). So, if the SMLLC has already been issued a new Secretary of State number…is the 8832 or anything else really needed? (4)Despite the conversion, is the way the LLC is taxed carried over from the S Corp? In other words, is the SMLLC still taxed as a corporation (by default)…or is it taxed as a partnership (and treated as a disregarded entity). Is the 8832 necessary for the latter treatment?
Thank you again for the clarification. I really appreciate the help.
Jonathan
Jonathan, yes, yes, yes, yes! At this point the State of California, and it’s agencies will be the only ones aware of your change in entity classification, but your EIN is a Federal number issued by the IRS. So, if you want to keep the same EIN and have the IRS treat the new entity accordingly, then the 8832 is necessary. Even though you may have a new State number from California, the IRS will still need to be aware of the change. Without filing 8832, then yes, your SMLLC will still be treated as a corporation because the IRS does not know otherwise.
Paul…thanks again for your help!