I filed my last tax return as an S -Corp last year and would like to convert now to LLC. How do I accomplish that?

Hello nyranger,

If you just made your S-Corp election effective last year (i.e. last year was the first year you filed as a S-Corp), you generally can't undo that election for 5 years. To get the IRS to approve you to change within 5 years requires a Private Letter Ruling which involves hiring a tax attorney and spending a significant amount of money for legal fees and IRS user fees. 

If you really don't want to do business as the S-Corp anymore, you could look into closing that business and opening a new entity. However, this could involve a lot of work also - if you had contracts, leases, etc. under the old business they would all have to be re-created. Also, closing the S-Corp could have significant tax implications. 

I would take a hard look at the costs and benefits of both options as well as simply leaving the S-Corp in place for 4 more years. You may find that leaving things as they are is the least expensive choice. 

Either way, I would highly recommend contacting a competent tax advisor and business attorney to evaluate the situation (and make whatever changes you decide upon), as well as to do some planning so you do not find yourself down the road with a similar issue.

Best of luck to you!

Hello nyranger,

Thank you for your question. I am happy to assist you.

The process of converting from an S-Corporation to an LLC is relatively simple from a legal standpoint. However, you should be aware of the consequences of doing so as it can impact the shareholders significantly.

You should start out with your S-Corporation’s directors voting to approve the conversion to an LLC and creating a conversion plan. Then, a majority of the stockholders would need to approve the plan. If the approval was successful, the next step would involve your state. In some states, the process involves completing a conversion form which needs to be filed with the Secretary of State of other governmental entity that is in charge of overseeing corporations and other business entities. Other states may involve creating a new LLC, merging the S-Corporation with the LLC, and then naming the new LLC as the survivor of the merger.

While there could be various benefits to of this type of conversion, there are some consequences as well. You will likely have to liquidate your S-Corporation to achieve this conversion. This process will be recognized as a gain under Section 336 as if the S-Corporation sold all of its assets. If the S-Corporation’s assets have increased in value between the time it was formed and the time it was liquidated and converted to an LLC, a capital gain is realized which means that the shareholders must pay capital gains tax on the amount of the gain.

Please refer to the articles by clicking on the links below for more information:

https://www.upcounsel.com/tax-consequences-of-converting-s-corp-to-llc#:~:text=There%20are%20two%20ways%20to,LLC%20that%20already%20has%20assets.

https://www.bergerlaw.net/making-the-switch-from-an-s-corporation-to-an-llc.html

Please let me know if this answers your questions, or if I can be of further assistance.

Thank you!

Shirleyh88