Converting your LLC to an S-Corp when filing your tax return can be a complicated process, but it’s possible. Learn how to do it. Converting your LLC to an S-Corp can be a complicated process when filing tax returns for tax purposes, but it is possible. You can submit the necessary documents to convert your LLC to an S-Corp for tax purposes as well as on your tax return. In some cases, your election to be taxed as an S-Corp may not take effect until the next tax year, so if applicable, the rest of your tax return should reflect this fact. Also, filing with the IRS as an S-Corp does not change the fact that your business remains an LLC for all other purposes.
Before taking any action to choose the IRS tax treatment for an S-Corp, the first step is to ensure that your company can meet the eligibility criteria for an S-Corp. The S-Corp must have fewer than 100 owners. It must be a domestic corporation organized under the laws of one of the 50 states, have no nonresident alien members, and none of the members may be other business entities, but classified under Section 401(a) or 501(c)(3) Non-profit organizations are exempt from tax laws. For more information on eligibility for an S-Corp, see the instructions for Form 2553 S Corp Election.
C Corporation Election
The IRS applies default rules to determine how LLCs are taxed. If your business is eligible for S-Corp treatment, technically the first step is to file Form 8832. This tells the IRS that you do not want your LLC to be taxed as a sole proprietorship or partnership under the default rules, but as a corporation. Unless you want to file as a C-Corp on your current or previous tax return, you should file 8832 in your S-Corp election and specify the first day of the tax year in which your S-Corp election can be effective as a valid C – Date of Corp election. This way, the IRS will continue to classify your business according to the default rules until the tax year in which your S-Corp election is in effect.
To choose an S-Corp treatment, submit Form 2553. You can make this decision simultaneously by filing your tax return by completing Form 1120S, attaching Form 2533, and filing it with your own tax return. This must be done within six months of the return on the due date; be sure to mark the first day of the tax year as the year indicated in line E of Form 1120S 2553. Alternatively, you can make the election valid for the current tax year by filing Form 2533 no more than two months and 15 days after the start of the company’s tax year, which will be reflected on next year’s tax return. All members of the LLC must agree to the election and sign the form when filing Form 2553.
Choose your tax year type
Part F of Form 2553 allows you to select the type of tax year the S-Corp will use. You can choose to use a calendar year or a 52- to 53-week year ending in December. But you can also choose a tax year calculated from the date you assume ownership of the company, known as the ownership year, or another tax year based on the period in which the company started doing business under its articles of association. If you choose any of these tax years, you must complete Part 2 of Form 2553.
S Corporation and C Corporation
When considering a potential S Corp Late Election, business owners need to understand how this option differs from the C Corporation. In summary, the differences between S corporation and C Corporation include:
- Company C is the default. Businesses must complete Form 2553 to become an S corporation.
- C corporations pay a flat corporate tax rate. Shareholders are also subject to personal income tax on dividends. S corporations do not pay corporate tax.
S corporations have rules on the number of types of shareholders allowed. A C corporation allows an unlimited number of shareholders, including foreign and U.S. shareholders, and a variety of stocks. C corporations can have partnerships and other corporations as shareholders, while S corporations cannot. If you plan to sell the company or spin off a subsidiary, the status of an S corporation may be limited due to this restriction.