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Written by : Palmer Kostecki
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converting from a limited liability company to a corporation this video will discuss the effects of the timing of the conversion the methods for conversion and why to convert in the first place just when is a good time to convert your company in most cases you need to convert because your investor requires it before they invest administratively and if you have time to project your future needs year end is a good time so you don't have to file part year partnership returns other tax considerations are payroll taxes and other tax filings in addition the appropriate conversion structure may have different effects on how the entity will be taxed consult a qualified tax professional for these considerations other things to consider when converting are that the conversion may not trigger a gain but the conversion may be taxable if your llc spent borrowed monies and deducted the expenses this can cause the members of your llc to recognize a gain on the conversion again have your cpa handy to determine any tax effects of the conversion and which method of conversion is best for your company most states provide four llcs to convert to corporations using a simple filing method the effects of a statutory conversion are at the time of the conversion of the llc by operation of law becomes a corporation and the owner of all the assets and liabilities of the llc you can merge your company with and into a newly formed corporation the llc will then be dissolved and again by operation of law the assets and liabilities become owned by the new corporation you can form a new corporation and contribute all the assets and liabilities from the llc to the new corporation here again the llc will be dissolved finally form a new corporation that is wholly owned by your llc and each member assigns their interest to the new corporation as mentioned before take into consideration the tax implications of the conversion method you choose your investor will play a big role in this decision if you are entering into an equity round of financing what you need to convert first and foremost is your member's approval this is dictated by your internal organizational documents or your state's statutes be sure to review your contracts to confirm nothing is triggered because of the type of conversion you choose check your licensing and permits many government agencies require notification for the change and may require documentation for the conversion depending upon the conversion you choose you may need to obtain a new company ein number check with your bank to determine what they need to keep your account compliant finally you may need to modify your branding to show that you are no longer an llc this may appear in contracts policies and your business cards converting from an llc to a corporation can be simple so long as you plan if anything is done wrong you may be subject to a large tax bill or delays in operations if done correctly your investor may invest more money as always consult experienced legal and tax professionals to ensure a smooth process you
Thanks for your comment Jefferson Swisshelm, have a nice day.
- Palmer Kostecki, Staff Member
we're going to talk about how to change your llc tax status to a corporation or s corporation your financial advisor or tax professional may have told you the potential benefits if you decide to have your llc file an election to be taxed as either a corporation or an s-corporation and this video discusses the benefits and process of filing such an election and the correct forms to use for making this election now the purpose of this video is to provide general information only before you take any action on anything covered in this video get the advice of a licensed tax professional such as a cpa and that was called my cya cover your you know the rest now if you change the llc's tax status to a corporation or an s corporation the legal status of the llc remains the same in other words you still function as an llc in every way such as the legal protection that it provides the only real difference is how it pays taxes how an llc is usually taxed by default a limited liability company llc is not recognized by the irs as a taxing entity so how the members pay tax is based on how many members that it has a single member llc is treated as a sole proprietorship or disregarded entity on the member's personal tax return a multiple member llc is treated for tax purposes as a partnership so your cpa will typically file a 1065 partnership tax form and the partners get the k1 form to attach to and report income or losses on their personal tax returns now both single member and multiple member llcs may elect to be treated as corporations or s corporations for income tax purposes and if you do have a single member llc there is a dating app for that so you can find a partner and live happily ever after electing corporation versus s corporation status now the process of changing the tax status of an llc to a corporation or s corporation is called making a tax election the two processes are different to elect corporation status one must file the irs form 8832 entity classification election for the llc to elect s corporation status the llc must file irs form 2553 election by small business corporation now back in the old days we would file the 8832 form and choose corporation taxation afterwards we would file the 2553 form and choose s-corporation election the irs website says that two-step process is no longer necessary an s-corporation is a corporation tax classification not a separate type of business a business that is already a corporation files the form 2553 to elect to be treated as an s-corporation llc is electing to be taxes corporations filing the form 8832 if you want your llc to be taxed as a corporation you must file the form now here are some things you need to know about this election this form allows eligible entities to file this election and llcs are by definition eligible entities this form also includes a consent statement which may be signed by all of the llc members or by one member on behalf of all the members if one member signs there must be some record in company membership meetings that all members approve to this election you must provide the names and identifying numbers of the owners such as the social security numbers for single member llcs and employer ids for multi-member llc's now the first section helps you to determine the eligibility of your business to apply for this change the second section asks you to select the current entity type and the type you are selecting the terms domestic and foreign in this section have to do with the state or country where the business is registered by the way llcs are disregarded entities or partnerships by default depending on how many members so no need for an 8832 to keep it that way but with an offshore llc you do need to elect disregarded entity or partnership status with the 8832 form the last section includes a consent statement and requires signatures single owner llcs and forms 8832 if your llc has only one member a single member llc the options noted on the form are to be classified as an association or be disregarded as a separate entity an llc with only one owner can be classified as a disregarded entity now this designation means the llc is not separate from the owner for income tax purposes filing business income taxes on schedule a c as part of the owner's personal tax return there is nothing you need to do to have this classification and for that matter i could use a classy vacation i'm thinking barcelona maybe the bahamas now if you checked no in box three because you don't have more than one owner you will need to give the owner's name and identifying number taxpayer id number then in part one box six you would check box c a domestic eligible entity with a single owner electing to be disregarded as a separate entity or box f a foreign eligible entity llc electing to be taxed as an s corporation in the same way as a corporation elects corporation tax status an llc may elect s corporation tax status by filing irs 2553 with the irs this election must be made with no more than two months and 15 days after the beginning of the tax year when the election is to go into effect so why elect s-corporation status the other tax option for your llc is to elect to be taxed as an s-corporation your llc will need to meet the eligibility requirements of an s-corporation both the llc by default and the s-corporation status are pass-through entities meaning that the income of the business passes through to the owners s-corporation status has two benefits first it allows the business to avoid the double taxation issue of corporations double taxation is taxing the c corporation on its income and then taxing the shareholder on its dividends in fact my grandmother once said harold when i touch the refrigerator and the stove at the same time i get shocked my grandfather replied well don't touch them both at the same time then along those same lines one way around the double taxation with the c corporation is to just pay a salary to the owners the salary is tax deductible to the corporation and simply don't pay dividends now s corporation officers who work for the business are considered employees they are not considered self-employed and they don't pay self-employment taxes social security and medicare on distributions of profits to the shareholders of the s corporation this can be a tremendous tax saving for those owners but it is very important to know that they must be paid a reasonable salary in addition to the distributions and pay income taxes social security and medicare on the salary portion of their income if you want your llc to be taxed as an s corporation you just need to file the form 2553 you don't need to elect to be taxed as a corporation first like we used to do in the old days form 2553 is similar to form 8832 above with some differences the election begins on a specific tax year and you must select the type of tax year including the fiscal year or financial year form 2553 discusses shareholders but your llc probably doesn't have shareholders in this case you should enter the percentage of ownership and the date acquired a single owner llc would have 100 of the ownership
Thanks Shavonne your participation is very much appreciated
- Palmer Kostecki
About the author
I've studied public service at Indiana University - Purdue University Indianapolis in Indianapolis and I am an expert in artificial neural network. I usually feel okay. My previous job was foreign exchange trader I held this position for 22 years, I love talking about planning and harmonica. Huge fan of Elizabeth Banks I practice alpine skiing and collect sports cards.
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