I NEED TO CONVERT MY CHAPTER S CORP TO A C CORP SO I CAN RETAIN SOME OF THE EARNINGS FOR FUTURE GROWTH
Estate Planning Attorney
In general, you can convert an S corporation to a C corporation by voluntarily revoking the S election at any time.
You and other shareholders may want to convert to a C corporation because of changes in the tax laws or to provide the corporation with more flexibility as the business evolves. Converting to a C corporation offers greater potential for broadening the investor base and raising capital (if the corporation decides to go public). It also allows the business to offer a wider range of tax-deductible fringe benefits.
No specific form must be filed with the IRS to revoke the S election. It is sufficient for the corporation to file a statement titled Revocation of S Corporation Status with the IRS and signed by the person authorized to do so. Attached to this should be a statement of consent signed by shareholders that, as a group, own more than 50 percent of the issued and outstanding stock of the corporation. However, to be effective on the 1st day of the corporation's taxable year (e.g., January 1), you must revoke the S election by the 15th day of the 3rd month of that tax year (e.g., March 15).
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You need to VERY CAREFULLY discuss this with an EXPERIENCED Tax Advisor, WHO HAS DONE THIS BEFORE, before doing this. Typically, coverting from an S Corp to a C Corp is DISFAVORED because you will be paying TWO levels of income tax - one at the C coporation level and one at the individual income tax level. Additionally, you need to review with your tax adviser what is in your S Corp AAA (Accumulated Adjusments Account) Account as a conversion could adversely impact how the money in the AAA account is later withdrawn after a C corp conversion. Finally, there could be additional tax costs (aside from conversion) to consider such as additional tax and business filings, and increased tax compliance (tax form preparation) costs to consider in making this decision. You also need to consider the potenttial that our new Obama administration may increase corporate tax rates making this decision more expensive. Our currrent state of the economy is a big consideration as our government is underfunded, and many state governments, including Ohio, are facing a funding crisis. In sum, get good and experienced help, it is worth the cost for good advice even if you have to look for a firm outside of Lima.
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I have faced this question recently, and I am not sure what is precipitating it. The threshold question is why would you make the change from an S to a C corp. The S corp does impose limits on stockholders, etc., and if those are a problem you may need a new structure. Generally though there are tax advantages with the S corp. All income is distributed to you personally and charged at your regular income tax rate. There is no double taxation of dividends., Of course, it is also difficulty to hold back retained earnings in an S corpl. If you have lost of retained earnings there may be advantages in a C Corp. However for family businss or small businessed owned by a few, an LLC or S Corp is a superior vehicle.
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As an additional follow up I agree an LLC is an option but again their are potential unfavorable considerations to an LLC as well. The laws on LLC are not as historically sound as the laws on S Corporations. This is a matter of personal opinion and can be a matter of debate among tax professionals depending on your business. There could also be some payroll tax issues to consider also. However, in sum, I agree in general, depending on the situation, converting to a C corporation is generally a bad idea because of the double taxation issues and what is in AAA. Again, you should consult with an experineced tax advisor and discuss all these issues. An election to an LLC may or may not be better. Overally, the cost of these conversions (paying business lawyers and tax professionals must also be considered).
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