Discussion Archives:Converting SMLLC to S Corp

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Discussion Forum Index --> Advanced Tax Questions --> Converting SMLLC to S Corp


Discussion Forum Index --> Tax Questions --> Converting SMLLC to S Corp

Tmillercpa (talk|edits) said:

7 August 2008
I have a client who is currently operating through a SMLLC. He purchased an office building (outside the LLC) and wants the LLC to pay him rent. I understand that this is not allowed since the LLC is disregarded and that it would be ok if he operated his business as an S Corp. My question is can he just elect the LLC to be taxed as an S corp or does he need to completely dissolve the LLC and actually incorporate? I am a CPA in North Carolina.

Kathyt (talk|edits) said:

7 August 2008
Just file form 2553 to elect to be taxed as S-corp

Tmillercpa (talk|edits) said:

7 August 2008
That's what I was hoping for but do you think that is enough since he is not actually "incorporating"?

Okie1tax (talk|edits) said:

7 August 2008
He is aware that he now will be an employee?

Tmillercpa (talk|edits) said:

7 August 2008
Yes, and that's ok with him. He's already doing payroll for employees and knows he will have to come up with a "reasonable" salary.

Kathyt (talk|edits) said:

7 August 2008
Read the instructions for the 2553. Under who can file, it says an domestic eligable entity electing to be taxed as a corporation. An LLC falls under that. Also in section L it says, "an entitiy without stock, such as an LLC, enter % of ownership." An LLC is a ghost entity for tax purposes, a SMLLC is by default a sole proprietor UNLESS it elects to be taxed as a corp or S-corp, a MMLLC is by default a partnership ULESS it elects to be taxed as a corp or s-corp. There's no such taxable entity called an LLC. There's no tax return specifically for an LLC, it's whatever it elects to be.

Tmillercpa (talk|edits) said:

7 August 2008
Kathyt, I appreciate all your information, but I know all those things and those are not the issue I'm getting at. If the IRS looks at the LLC electing to be taxed as an S corp, are they going to say, it's really an LLC paying the owner rent and disallow if we don't go through the formal process of actually incorporating.

Kathyt (talk|edits) said:

7 August 2008
Sure they will say it is really an LLC because it will be an LLC. Electing to be taxed as a corporation doesn't change the fact that it's still an LLC by law, not a corporation. We have the choice to elect to be taxed as a corporation, they give us the choice, they can't give us the choice and then say, "no it saved you tax money so you we're not going to let you do it". Just make sure that everything is reasonable, reasonable salary, rent is FMV...
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