Many business owners are becoming interested in transitioning their businesses into S corporations. By filing under Sub-chapter S of the Internal Revenue Code, businesses are entitled to a number of tax benefits. Most notably receiving a single level of tax, and significant discounts on payroll taxes. If you have an existing LLC, you may already meet the eligibility requirements without even knowing it. There are several advantages of incorporating with an S Corp. To learn how to form an S corp with an existing LLC, follow the steps listed in this post.
Check Eligibility Requirements
Before you apply to become an S corp, you must ensure you meet the eligibility requirements. As an existing LLC, you may already meet many of the current requirements without even knowing it. You need to be an eligible and domestic corporation. By eligible, this excludes all insurance companies, domestic companies operating internationally, or financial institutions. Your business must only produce one class of stock. In addition, you must have no more than 100 shareholders, all of whom consent to an S corp election. Shareholders must be individual investors and not companies, partnerships, or non-residents. Furthermore, you must be prepared to, or have already prepared to adopt a consistent tax year. As you plan to transition your LLC into an S corp, consider the eligibility requirements associated.
Fill Out Forms 2553 And 8832
You need to fill out important documents with the IRS before you can formally transition your company. Most important, is Form 2553, the Election by a Small Business Corporation. This document is comprised of four parts, and must be assessed and signed by all shareholders of your corporation. Existing LLCs are additionally required to fill out Form 8832. This form classifies how businesses will be classified for federal tax purposes. As an existing business owner, you need the form to affirm your structural transition. This form must be prepared and submitted before the S corp filing deadline. Before you can begin operating a S corp, you must fill out Forms 2553 and 8832.
Refresh Your Corporate Bylaws
Following your completion of necessary paperwork, revise your corporate bylaws. Your bylaws should specify how your organization is to be operated. Dictate which corporate decisions are to be made by shareholders. Arrange methods to appoint directors, hold meetings, and notify shareholders. While they are not required by state officials, your bylaws may be needed for eventual litigation purposes. As you transition the organizational structure of your business, it is often helpful to revise any discrepancies. Refresh your corporate bylaws as you transition your business into a S corp.
Choose Election Date
Choose the best election date to affirm your transition. The election date is often the day that shareholders review and sign Form 2553. The election itself must be conducted by a specific date to be recognized by the IRS. The date must be within two months and fifteen days after the start of the selected tax year. Within this, it can occur at any time throughout the previous tax year prior to the transition. Choose an election date that complies with IRS deadlines to affirm the formation of your S Corp.
Revise Tax Structure
The final step in transitioning your business is to revise your existing tax structure. The tax structure of S corps and LLCs is very similar. S corp owners pass their net income or overall losses to their shareholders. However, there are several distinctions between tax structures of LLC vs S corps. Owning a S corporation, you must additionally pay Social Security and Medicare taxes to yourself and your employees. In paying yourself, the IRS requires you provide yourself a ‘reasonable salary’ to avoid dodging tax requirements. In addition, one of the primary benefits of your revised tax structure is that it should avoid double taxation. Owning a S corp, you are not required to pay income taxes as a business entity, this saves you from a major drawback of business ownership. Revise your tax structure before beginning to operate your newly formed S corp.
S corporations are becoming a popular ownership option for existing LLC owners. Many current business owners already meet the eligibility requirements without even knowing it. If you do, fill out the necessary forms 2553 and 8832. Refresh your corporate bylaws to be updated with your current business structure. Choose an election date for your transition. Furthermore, revise your existing tax structure. Follow this post to learn how to form an S corp with an existing LLC.