How to Convert an S Corporation

Electing to be a Subchapter S corporation has its benefits, but there's a time when a business will want to convert to a C corporation. This happens when the company wants to enlarge its shareholder base, such as if it were going public, or issue different types of shares, among other reasons. It's relatively easy to convert an S corporation by revoking the S corp. election, but the process is detailed and must be followed precisely.

Instructions

1. Write a letter. There is no form to revoke a Subchapter S election, but it can be done by sending a letter to the IRS. The letter must include the name of the S corp., its tax ID number, and a clear statement that the owners of the company revoke the election of Subchapter S status. It must also state the number of shares of stock issued and outstanding at the time of revocation.

2. Get shareholder approval. By law, more than half of the shares must consent to the revocation. A detailed statement of consent must be attached to the statement of revocation letter, or incorporated into that document. For each shareholder consenting to the revocation, the name, address, taxpayer identification (Social Security) number, number of shares of stock owned, and date of acquisition of stock must be included. The date on which the shareholder's taxable year ends, which primarily applies to corporate shareholders, must also be stated. Consenting shareholders must sign under penalty of perjury, which can be done with the use of a notary public.

3. Mail on time. To be effective in the current tax year, the revocation must be filed on or before the 15th day of the third month of the year. Revocations made after that date take effect on January 1 of the following year.

Tips & Warnings

• Mail your Subchapter S revocation package to the same IRS service center that received your original Subchapter S election.

• Revocation of Subchapter S election can only occur if the company has not been filing as a C corp., and the owners have been reporting the company's income on their individual tax returns. If this is not the case, the tax returns will have to be amended before Subchapter S status can be revoked successfully.

References

• Revocation of S Corp. Status
• § 1362. Election; revocation; termination

Resources

• Can I change my business from an S corporation to a C corporation?
• Will converting my business from an S corp. to a C corp. provide tax benefits?
• Title 26, Subtitle A, Chapter 1, Subchapter S