Discussion:Converting a LLC to a S Corp

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Discussion Forum Index --> Tax Questions --> Converting a LLC to a S Corp


CvilleAccountant (talk|edits) said:

10 January 2006

I have a client that wants to convert an LLC to a S Corp early this year. They want to make sure not to get hit with a big tax bill like they did last year, and are unsure about the tax effects and salaries and draws.

I've never handled converting before. Any suggestions on it's effects would be appreciated.

Mstax (talk|edits) said:

3 March 2006
Why not apply to be taxed as a S-Corp. File for 2553. Keep the same FEIN and payroll numbers.

JR1 (talk|edits) said:

3 March 2006
Nothing to be concerned about. Indeed, S Corp law is easier to handle. The two downsides off hand, are that the company's debt can't be counted as basis for losses...oh, three!...the ownership split of profits must match the stock ownership, and there must be salaries paid that are reasonable, so that SS taxes get paid in. Go to www.salary.com for that. Otherwise, it's a tax-free reorg, either sec. 351 or 751...

Note, you cannot go the other way, from an S to an LLC without probably picking up some tax...

MStax's comment is interesting. I remember talking about this at a tax seminar...I'd have to think about that. There was a downside, but I don't recall what it was now...

JR1 (talk|edits) said:

March 1, 2007
Yeah, and there are two sites to check for salary. www.salary.com and the one I've liked better lately is www.payscale.com.

Will (talk|edits) said:

1 March 2007
I have already ran into 4 LLC's as S-corps this year. It seems to be increasing in popularity at least in OR.

Diz (talk|edits) said:

24 April 2007
What would be "reasonable cause" for a late election (in Apr 07) when you've had the LLC for over 2 years? The first year of business was a startup year with a small profit. Last was the big whammy. Clients did not see the impact until taxes were done (not by me) - after the March 15 deadline.

Pegoo (talk|edits) said:

24 April 2007
Blame it on the attorney hehe.

Tsholly (talk|edits) said:

25 April 2007
I had a retired school teacher that went into real estate. We successfully (to my surprise) used the "taxpayer is new to the business world and tax regulations" and "taxpayer thought the election was made with the tax return". We did it in July of 2006 and got the S election for Jan 1, 2006.

Dsglouise (talk|edits) said:

25 April 2007
Thomas, would you please clarify what you mean by "We successfully used the "taxpayer is new to the business world and tax regulations" and "taxpayer thought the election was made with the tax return". What is it? Did you write a letter explaining things, or used some form…?

Thanks

Tsholly (talk|edits) said:

27 April 2007
Form 2553 was "Filed Pursuant to Rev Proc 2004-48" which requires a statement to be attached detailing the "reasonable cause" for the late election.

Swheeler (talk|edits) said:

27 April 2007
Greetings. What an excellent web site for flushing out issues you can't get an answer for easily in publications. In CA, the S corp tax is 1.5% on net income. The tax on LLCs is based on gross receipts and caps at about $12,000 regardless of net profits. So converting in the case where net profits are low and gross receipts exceed 5M is a great idea unless basis is an issue thus making the S corp a bad choice since debt can't be folded into the equation for at risk. My questions are regarding the structure. What I'm not clear about is that according to the IRS, it's now a simple matter of filing form 8832 that allows the LLC to become either an S corp or a C corp as the S election is no longer required in addition to this form. However, whereas this seems so easy, it would appear that there are many administrative hurdles involved here. Do stock certificates get issued since it's now an S corp where distributions must be proportionate between shareholders? Does CA automatically allow the LLC conversion, or are more hurdles required? If anyone can shed some light here, the feedback would be welcome.

Swheeler (talk|edits) said:

27 April 2007
One more thing, can you do a conversion during the year by filing a short year LLC return and short year Sub S corp return? In my case, the savings in taxes are about $11,000 per year.

JR1 (talk|edits) said:

April 27, 2007
Incorrect for the S. File 2553 alone in place of 8832. The S election will take effect the beginning of a year, which one depends on when the 2553 is filed. Too late now for 07.

Diz (talk|edits) said:

8 May 2007
I read Rev. Proc. 2004-48(4.02) to require 2 statements - one as to the late filing of form 2553, and one as to the late filing of 8832, even though 8832 is not required.

Also, is the statement from you, or the taxpayers? Is the statement signed by the taxpayers?

Kevinh5 (talk|edits) said:

8 May 2007
The statement is from the taxpayer, (or the managing member), the 2553 has to be signed by anyone affected by the S election even if they are no longer a member.

JR1 (talk|edits) said:

May 8, 2007
Follow the Rev Proc then. But I believe that was superseded to longer require the 8832. Won't hurt anything tho'.

Jdugancpa (talk|edits) said:

8 May 2007
SWheeler, I am not an attorney, but my guess is that stock certificates are not required for an LLC to be treated for tax purposes as a corporation. I think the equity section of the B/S will include paid-in capital and retained earnings but no common stock. Any attorneys out there that can weigh in on this topic?

Diz, are you hoping to elect S status effective 2005? I don't think you're likely to get that approved unless the entity and its members had all acted as though it were an S corp from the get-go. I believe that is one of the requirements.

Diz (talk|edits) said:

8 May 2007
JD,

Nope! Just going for 1.1.07. I wish I could get 1.1.06, but they weren't acting like an S corp and that seems to be a requirement when the return has already been filed.

Swheeler (talk|edits) said:

10 May 2007
Great info. But again, my reading indicates that just recently, the 2553 wasn't needed, just the 8832. Also, as for the certificates. I assume then that if no stock is issued when an LLC converts to an S corp, then distributions are governed by the LLC agreement.

Kevinh5 (talk|edits) said:

10 May 2007
SW, it is the other way around, 8832 not required, just 2553.

Distributions would have to follow S corp tax rules.

Kevinh5 (talk|edits) said:

10 May 2007
what reading source are you looking at that says just 8832?

Chase (talk|edits) said:

10 May 2007
Just got a call from a prospective client. He wants to refinance his house and wants to start issuing payroll for himself and wife (LLC members). Told him, no way, no how since the LLC is taxed as a partnership that he would be able to receive a W2. Next thing he told me is that he wants to convert the LLC to an S Corp so that he could have a W2 so that he could refinance. Apparently mortgage broker insists on having a W2. I told him he was working with the wrong mortgage broker. NOW he wants to convert his LLC to an S Corp because he wants a W2 so badly. I told him not to move so fast. I don't think that this is a good reason to move from an LLC to an S Corp -- for sure. Is it 5:00 yet? No.

JimS ME (talk|edits) said:

11 May 2007
I'd like to reiterate that you don't need to reorganize the company. LLCs are not recognized by the IRS, so you can elect to have them taxed as a Sole Proprietorship/Partnership or as an S-Corp. Simply file a 2553 S-Election and begin filing an S-Corp return. Same entity, so no new ID numbers etc, and you dont have the legal overhead of a Corporation. KEEP THE LLC!

Jdd57cpa (talk|edits) said:

30 October 2007
My client is also wanting to convert late from an LLC to S-Corp and I just want to make sure I have this correct as things seemed to bounce back and forth above.

So, to sum this great string... to convert an LLC to an S-Corp, only use Form 2553. Furthure, if client wants late election to beginning of '07 then add Rev Proc 2004-48(4.02) statement to 2553. No 8832 (or respective late filing statement) is required. File the S-Corp return for 07. Do I have it right?

Will IRS let us know if our late S election be accepted and how long does it usually take?

Please Note: If you are in CA, be careful of payroll. The Employment Developement Dept (EDD) does not conform to the federal rules and will not treat managing members as employees. This will have implications on payroll taxes for CA and your W-2. Spidell Publishing "The Life of an Entity" covers this well.

molto graci, ciao

TheTinCook (talk|edits) said:

30 October 2007
Check out Rev. Proc. 2007-62

I'll have to research that CA part. Thanks for bringing it up.

Fernando (talk|edits) said:

7 November 2007
Hi,

I have a similar case. An LLC for two years that wants to be converted into a C-Corp. Would this have any tax consequences. Any forms that need to be filed?

Kevinh5 (talk|edits) said:

7 November 2007
8832 - wouldn't change entity to a corp, but would allow the LLC to be taxed as one

Aunt Emmy (talk|edits) said:

7 November 2007
Gonna change that LLC to a CCorp officially, or just going to change the way its taxed?

If the business is officially changing from an LLC to a CCorp then file a final form for the LLC and an initial form for the CCorp. Got any questions about transferring the assets?

Tax consequences can be mighty. CCorps are subject to that double taxation, right? CCorps are not flow thru like LLCs or SCorps, right? Lots of differences. Tell us some more.

Johnhuddleston (talk|edits) said:

1 December 2007
Any truth that LLC taxed as S Corp has greater liability protection? (i.e. some say you don't need to maintain the Corp formalities this way - shareholders meetings, etc). I know there's not much case law and it varies by state.

John Huddleston

JR1 (talk|edits) said:

December 1, 2007
Depends on the state, John. Some folks are hanging their hat on that, that the LLC doesn't require corp legalities, but still has the protection. Frankly, chat with an attorney in your area who handles small biz stuff. The protection ain't much at best, and I think that you're in no man's land with an LLC taxed as an S. What does that mean after all? That some S legalities should be adhered to as well? Which ones? Who knows...why I don't like the check the stupid box. Too many unknowns.

TheTinCook (talk|edits) said:

1 December 2007
Liability protection and legal form have nothing to do with entity classification elections. If you formed as an LLC you gots to live by the LLC rules for your state for all purposes but tax. An LLC ersatz S-Corp wouldn't need to follow the corp formalities (i.e. BODs, shareholder meetings, etc) due to the 8832/2553 elections.

It's the incongruities of doing the return that get me. Like squeezing a LLC b/s onto Sch L Form 1120s. I fear suffering a psychotic break while doing such a return.

Anne (talk|edits) said:

24 December 2007
If an LLC wants to be taxed as a C corp, instead of an S corp, can they file a 8832 now, this late in the year for 2007? I thought they had to do it within a certain time period.

TheTinCook (talk|edits) said:

24 December 2007
Too late to do it for all of 2007 unless you are a newly formed entity that qualifies under Revenue Procedure 2002-59 (also available at IRS.gov on pg 615 of IRB 2002-39) or you want to pay for a private letter ruling.

If you don't mind having short period returns, then you can still file the 8832, but you can only go back 75 days from the filing date. Remember to mail it CMRRO.

Anne (talk|edits) said:

24 December 2007
If they do file the 8832 for 2008, it's to be taxed as a C corp. only. They want to start having additional shareholders, some foreign, that's why the C corp. instead of S corp. I'm thinking they should just file a final return for the LLC this year and start the corp. for 2008. Does that seem the best way to go?

JimOhio (talk|edits) said:

10 September 2008
A late S corp election can be made by filing the 2553 with the first return with some language found in the instructions of form 2553. I actually listed the reasonable cause for filing it late.. I think they want to know the reason it is filed late.


Cpahoney (talk|edits) said:

18 November 2010
Cpahoney has re-posted this question over on the tax forum - see Discussion:LLC filing S Corp return want to change to a partnership return..

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