There’s Still Time to Become a S-Corp in 2010
Filed Under: S-Corporation
Tags: S-Corporation, Taxes
If you’ve been following this blog or have ever incorporated a business then you probably already know about the S-Corporation or S-Corp, and the tremendous pass-through tax benefits associated with it. If not, check out Background on S-Corporations for a quick crash course. Though the concept is easy grasp, many fail to understand how a business entity becomes an S-Corp.
The term S-Corp is really just a nickname for a corporation or an LLC that has qualified and has elected Subchapter S tax status from the IRS. But in order to get the status YOU HAVE TO APPLY FOR IT! Too often we see individuals form their businesses with the intentions of becoming S-Corps but never submit the application to the IRS. Then come tax time, they scramble to complete the process only to find out it is too late……….for last tax year, at least.
Making the Subchapter S election for a corporation or other qualifying entity is done by filing form 2553 no more than two months and 15 days after the beginning of the year the election is to take effect. Basically, this makes for two situations.
Situation 1: If a qualifying entity had a tax year prior to 2010, it has until March 15th to make the election for the 2010 tax year.
Situation 2: If the entity is new and had no tax year prior to 2010, then it has approximately 75 calendar days (more or less depending on the months) to make the election. For example, if the entity began its tax year on January 10, then the two month period ends on March 9 and 15 days after that is March 24. It could file form 2553 no later than March 24 to be eligible for the election in 2010.
Whether you have formed a new company in 2010 or you had formed a company prior to the New Year, it is not too late to become an S-Corp. To find out how the professionals at Harvard Business Services, Inc. can help make your entity an S-Corp, call 800-345-2677.
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.
Background on S-Corporations
Double taxation is a horrible practice, which many governments around the world embrace thoroughly. It’s the nasty habit of a government to tax your company’s profits, and then when you distribute the after-tax profits to the shareholder’s they TOO have to pay tax on money the company already paid the tax on.
In the USA, we have wrestled with the “dividend” tax in many ways, but the creation of the IRS tax code known as “Subchapter S” is probably the best-known and most effective way to avoid double taxation. Basically, it says a company organized as a S-Corporation does NOT PAY TAX at the entity level. Instead, the company passes its dividends through to its shareholder and THEY pay the tax on their portion of ownership.
Now, pass through tax treatment can also be achieved through the LLC but major corporations, with thousands of shareholders cannot avoid double taxation since there is 100-person limit on the number of shareholders an “S Corp” can have.
This blog category will help you understand all the benefits of an S-Corporation as time goes on. We invite you to join the conversation by leaving a question or comment.
