How to Change a Business to a S Corporation
There are many tax advantages available to companies that elect to be taxed under Subchapter S of the Internal Revenue Code. Among these are complete exemption from federal corporate taxes (except for passive income) and exemption from the retained earnings tax. Although not all companies qualify for S corporation status, the IRS has established clear and objective standards for this election.
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Instructions
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Determine if your company qualifies for tax treatment under Subchapter S. S corporations may not have more than 100 shareholders, may not have corporate shareholders and may not have nonresident alien shareholders. They may not issue more than one class of shares, and may not be organized under the laws of a non-U.S. jurisdiction. A complete list of requirements is on the IRS website (see Resources).
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Choose the tax year in which you wish your company to convert to S corporation status. If you file for S corporation status after the 15th day of the third month of your company's tax year, your election will not take effect until the following tax year, unless special procedures are followed.
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Obtain IRS Form 2553, Election by a Small Business Corporation (see Resources) and the Form 2553 instruction booklet.
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Fill out Part I by listing company identification data and the desired date of conversion to S corporation status. You must list all of your company's shareholders and the social security numbers of individual shareholders. Fill out Part II if you wish to convert to S corporation status during the current tax year, and fill out Part III if any of your shareholders is a qualifying trust.
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Have a company representative sign Form 2553 along with all shareholders who have held shares at any time during the current tax year. Submit it to the IRS Service Center with jurisdiction over your company (as listed in Form 2553 Instructions).
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Tips & Warnings
Even though they are not corporations, Limited Liability Companies (LLCs) may elect to be taxed under Subchapter S if they qualify under the foregoing restrictions.
S corporation shareholders are taxed on corporate income regardless of whether it is distributed to them or not. As a result, their individual income tax burdens may increase when S corporation status is elected if the corporation does not normally distribute much of its income in dividends.
