How to Convert a Corporation to an LLC or an S Corp
A smaller company often finds it advantageous to convert from a standard, or C corporation, into a limited liabilty company (LLC) or S corporation because it eliminates double taxation. The two processes are quite different, and changing to an LLC in particular has substantial tax consequences if done incorrectly. In both cases, it's helpful to have the advice of an attorney before deciding to convert your company.
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Things You'll Need
- IRS Form 2553
- Articles of organization
- Operating agreement (in some states)
- Schedule K-1 (for S corporation)
Instructions
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Converting to an LLC
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1
Weigh the advantages and disadvantages of converting to an LLC. The advantages are that the owner's personal assets are still protected, you are only taxed once through the members' personal tax returns, and there are fewer rules on the structure and management of the business. The disadvantages are that not all businesses qualify to be an LLC, and you are unable to buy and sell stock in the company.
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2
File your LLC's articles of organization with the Secretary of State's office. A filing fee is required, which varies widely depending on the state. Some states also require you to file an operating agreement.
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3
Merge your corporation's assets into the newly formed LLC. There are options for mergers that give tax-free advantages when transferring the assets. In most cases this will require a certified accountant, as there can be serious tax consequences. Once your assets are merged, you can dissolve the corporation.
Converting to an S corporation
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4
Weigh the advantages and disadvantages of converting to an S corporation, which gets its name from the chapter of the IRS code that applies to it. The advantage is that instead of being taxed when the company makes a profit and again on the shareholders' returns, the company is taxed only once on the shareholders' personal returns. The disadvantages include a limit on the number of shareholders.
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Complete IRS Form 2553. All shareholders must sign the form. When complete, submit it to the IRS and keep a copy for your file.
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File a K-1 statement with your individual tax return. All shareholders will receive a K-1 statement for the tax year, which details each individual's share of the corporation's net income. This income is then taxed at each shareholder's individual rate.
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Tips & Warnings
You can easily submit a form to change to an S corporation if you qualify, and then later change to an LLC.
Seek advice from a lawyer and an accountant before making a decision to convert your corporation.
