The type of business you choose to run can have significant consequences for almost every area of your operations, and none less so than on federal taxes.
If you’re new to the world of business, you might not know that an S Corporation (better known as an S Corp) passes corporate income, losses, deductions and credits to all of its shareholder, while a C Corporation (better known as a C Corp), taxes the owner and business, separately. However, even if you opt for a certain type of legal structure, it doesn’t necessarily mean that you can’t swap from one to another. In the case of wanting to go from a S Corp to a C Corp, it can be done, but you should bear the following things in mind:
Depending on the reason for wanting to convert, the process might have to begin by a certain time
The decision to convert from an S Corp to a C Corp may be entirely voluntary, or it may be that it has been terminated by the law and automatically converted to a C Corp. if you’ve made the decision yourself to convert to a C Corp, then you’ll need to get the ball rolling by the 15th of March. As soon as you’ve got agreement from all of the shareholders, the process can begin to move along quite quickly.
You’ll need to file a ‘revocation of S Corporation Status’ form with the IRS Service Center
Wherever you filed for an S Corp originally, is where this particular form must be filed from, and once the document is complete, you must get it signed by the same person who is legally authorized to sign the company’s corporate tax returns. A statement of consent will also need to be included, and must be signed by any shareholder with more than 50% of the company’s stock.
Be sure to copy all documentation and store it away safely with your records, lest you need them for tax purposes in the future.
Some potential consequences to be aware of:
Once the conversion process has been completed, the business will only have a certain amount of time in which to distribute any earnings to shareholders. Keep in mind that when that window closes, all distributions will go on to be taxes as dividends. Similarly, should you happen to convert in the middle of the year, two tax returns will need to be filed by your business. Unfortunately, this can cause significant complications, so try and make sure everything is completed and finalized on or before the 15th of March.
Lastly, keep in mind that once you do make the conversion, going back to an S Corp won’t be possible for a minimum of five years, unless you get specific approval from the IRS. With this in mind, take the time to discuss your decision at length with everyone involved, to make sure it’s the right one.
When all’s said and done, there are definitely advantages of converting from an S Corp to a C Corp, but you must carefully consider the potential long-term implications it can have. Before taking such a big step, always consult with an entity management company or financial professional so that you can be sure the decision you’ve made, will help you gain the desired benefits in the future.