|
|
Nevada Registered Agent Service™ The
PREFERRED choice in Registered Agents since 1991 |
||
|
||||
Electing S Corporation Status for a Limited Liability
Company
Last updated Sunday, April 7, 2024
In some situations, business owners have state-law reasons
for wanting their business to be formed as a limited liability company (LLC),
but for tax purposes they would prefer S corporation (rather than partnership)
tax treatment. For example, S corporation status may be desired because a
partner in a partnership is subject to self-employment tax on his or her
distributive share of the partnership’s trade or business income, while an S
corporation owner is not subject to self-employment tax on his or her pass-through
income or distributions from the S corporation.
To elect for S-Corp treatment, file Form 2553. You
can make this election after you initially obtain your EIN
number. If S corporation shareholders want
to be taxed as a C corporation, all that’s required is filing this election
with the IRS. An LLC that is taxed as a pass-through but wants to be taxed as a
C corporation can also simply make a filing with the IRS. However, if the LLC
owners want to convert their LLC into a C or S corporation, they will have to
comply with both their state corporation and LLC laws and file documents with
the state. These filings include dissolution/withdrawal filings, formation
filings, and more.
An LLC can elect under the check-the-box rules to be
classified as a corporation. If the LLC makes the election it is deemed to (1)
transfer all of its assets and liabilities to the corporation in exchange for
the corporation’s stock and then (2) distribute the stock to its owners in
complete liquidation (Regs. Sec. 301.7701-3(g)(1)). The deemed transfer to the
corporation is tax free, assuming Sec. 351(a) applies and the LLC’s liabilities
do not exceed the basis of its assets. The LLC can then elect S status,
assuming that its members are eligible to hold S corporation stock (Regs. Secs.
1.1361-1(c) and 301.7701-3).
The entity normally files the election to be taxed as a
corporation on Form 8832, Entity Classification Election ,
in accordance with Regs. Sec. 301.7701-3(c). However, if an LLC that is
eligible to elect S status timely files an S election (Form 2553), the entity
is considered to have elected to be taxed as a corporation (Regs. Sec.
301.7701-3(c)(1)(v)(C)). This means that the entity does not have to file the
Form 8832 if it timely and properly elects S status.
Under Regs. Sec. 301.7701-3(c), the effective date of the
classification election specified on Form 8832 cannot be more than 75 days
before the date on which the election is filed and cannot be more than 12
months after the date on which the election is filed. This means that the
classification change can be retroactive for up to 75 days before the entity
files Form 8832. Under S corporation rules, however, a newly formed corporation
must file the S election on or before the 15th day of the third month following
the corporation’s activation date, which is the earliest date that the
corporation has shareholders, acquires assets, or begins conducting business.
If the entity plans to elect to be treated as a corporation
and become an S corporation on the same date, only Form 2553 is filed, and it
should conform to S corporation rules. The authors recommend that the entity
file the Form 2553 by the earlier of 75 days or two months and 15 days after
the date the S election is to become effective. In this way, the entity will
have filed Form 2553 within both the Form 8832 and Form 2553 filing limits.
Tip: An LLC
that elects to be treated as a corporation and become an S corporation on the
same date is not required to do so on the first day of the calendar year.
Rather, the election can be retroactive or prospective within the time limits
surrounding the date the LLC files Form 2553, as outlined above. Allowing an
LLC to make a midyear S election makes sense because a newly electing S
corporation can begin its first S year at any allowable date. To conform to S
corporation rules, however, the authors recommend that the effective date of
the S election should not occur before the earliest date that the LLC has
members, acquires assets, or begins conducting business.
An entity that makes the deemed election to be taxed as a
corporation by filing the S election, Form 2553, will be classified as a
corporation on the date the S election is effective and will continue to be
treated as a corporation until it makes another entity classification
(Regs. Sec. 301.7701-3(c)(1)(v)(C)). If an entity elects to change its
classification, it cannot do so again during the 60 months after the effective
date of the election without the IRS’s permission (Regs. Sec. 301.7701-3(c)(1)(iv)).
Since no actual incorporation takes place and no shares are
issued, how does an LLC complete the S election Form 2553? While the
instructions offer some guidance, they do not divulge how an LLC shows the
effective date or state of incorporation. It would seem, the authors recommend
that a copy of the Form 8832 be attached to the Form 2553, along with a
statement that the entity has made the check-the-box election and is now making
the S election. If the LLC has not filed Form 8832, the effective date of the S
election could be entered. The instructions say that the number-of-shares and
date-acquired sections of Form 2553 should show each individual’s percentage of
ownership and the date(s) acquired.
If the LLC does not file Form 8832, the authors recommend
that a statement be attached to the Form 2553 that the entity is electing to be
classified as an association taxable as a corporation under Regs. Sec.
301.7701-3(c)(1)(v)(C). In Rev. Proc. 2013-30, the IRS updated and consolidated
the procedures for requesting relief when taxpayers miss the deadline for
making a number of S corporation-related elections, including the election to
be treated as an S corporation under Sec. 1362(a) and the election to treat an
eligible entity as a corporation under Regs. Sec. 301.7701-3(c)(1)(v)(C) so
that it can elect to be treated as an S corporation. The relief available under
Rev. Proc. 2013-30 is in lieu of requesting relief via the letter ruling
process, and user fees are not charged.
When an eligible entity classified as a partnership elects
to be treated as a corporation (or converts into a corporation under a
state-law conversion statute), the partnership is treated as contributing all
of its assets and liabilities to the corporation in exchange for stock. It is
also considered to have liquidated by distributing the corporation’s stock to
its partners immediately before the close of the day before the election is
effective. Thus, if the conversion takes place at the beginning of the year,
the deemed contribution and liquidation are treated as if they occurred
immediately before the close of the previous tax year. If the corporation makes
a timely S corporation election for its first year, the corporation will be an
S corporation for that year, and there will be no intervening period during
which the entity was a C corporation (Rev. Rul. 2009-15).
Tip: Partners
may want to incorporate their partnership to obtain personal liability
protection and ensure the business’s continuity. If S corporation status is
elected, the business can continue to pass through its gains and losses to the
owners. Because of the S corporation pass-through rules, however, special
allocations will not be allowed.
When an LLC elects S status, it is imperative that its
operating agreement and other documents conform to the S corporation
eligibility requirements. Any prior documents based on the LLC’s treatment as a
partnership must be amended or replaced. If, for example, the LLC’s operating
agreement allows special allocations of income or loss to be passed through to
members, the LLC is not eligible to be treated as an S corporation because it
would be considered to have more than one class of stock. (An S corporation has
one class of stock only if all outstanding shares (which, in the case of an
LLC, would be membership interests) confer identical rights to distribution and
liquidation proceeds. Differences in voting rights are ignored.) Allocations
based on anything other than percentage of ownership breach the
one-class-of-stock rule and are not allowable in an S corporation.
S corporation shareholders must be of the same class, except
for the ability to hold voting and nonvoting shares. The operating agreement of
an LLC operating as a partnership, on the other hand, might specify that
certain members are general partners and that others are limited partners. The
IRS has ruled that the general and limited partnership interests that confer
identical rights to distribution and liquidation proceeds satisfy the
one-class-of-stock requirement (see IRS Letter Rulings 9739014 and 199942009).
However, the IRS announced that it will not issue advance letter rulings on
whether state-law limited partnerships that check the box to be taxed as
corporations have more than one class of stock (Rev. Proc. 2013-3, §5.01(18)).
This revenue procedure and its predecessors cause uncertainty as to whether
such interests will presently conform to the one-class-of-stock rules.
Nevada
Commercial Registered Agent
Entity # E0502742015-6
NV Business ID NV20151637034
|
Nevada Registered Agent Service™ |
Services |
Important Information |
Company |
|
|
|
|
|
|
10409
Pacific Palisades Ave. |
|||
|
Las
Vegas, NV 89144-1221 |
|||
|
|
|||
|
(702)
628-7279 - Phone |
|||
|
(800)
948-0601 - Fax |
|||
|
|
|
|
© 2024 Marc Gohres
Revised April 7, 2024 10:24 AM
THIS IS A SECURE SSL WEBSITE
PROTECTED BY SHA-2 AND 2048-BIT END TO END ENCRYPTION
Nevada
Registered Agent Service™ and the Nevada Registered Agent Service™ logo are
registered trademarks and may not be used, displayed or reproduced without
written consent of Nevada Registered Agent Service™.
Your use of
this website and its contents constitutes acceptance and agreement of our TERMS OF
USE and our PRIVACY POLICY.