Why Convert Your Tax Status from S-Corp to C-Corp
The most common change in taxation status is from a C corporation (usually a General Corporation) to an S corporation in order to allow for pass-through taxation of income or loss. This is typically done to avoid double taxation of corporate income.
However, business owners do sometimes want to convert their tax status from an S corporation to a C corporation, usually because their companies no longer meet the requirements outlined by the IRS to be considered an S corporation.
The following requirements must be met in order to retain S corporation tax status:
- Must file IRS Form 2553 in a timely manner
- Approval of all shareholders of the corporation
- Limited to no more than 100 shareholders
- Shareholders cannot be non-resident aliens
- Shareholders cannot be other S corporations
- Cannot have more than one class of stock
If any of these requirements are not met, you must convert the tax status of the corporation. For example, you would need to change your corporation’s tax status if you want to increase your company’s number of shareholders with the goal of receiving additional funding or if you’d like to bring on foreign investors.
If the corporation violates any of the S corporation requirements, the IRS can automatically terminate a company’s 'S' tax status.
Benefits of Switching from S-Corp to C-Corp Status
One reason to convert your S-Corp to a C-Corp is to generate more funding. One of the benefits of a C-Corporation is that is has more flexibility when raising capital. Since C-Corps can have an unlimited number of shareholders, it is usually much easier to attract investors.
Another reason to change the tax status is your corporation would like to accumulate income without the shareholders being taxed on their portion of the retained income. If your company is a C Corporation, the shareholders are only taxed on the dividends they receive.
How to Convert Your Tax Status from S-Corp to C-Corp
The IRS does not offer a standard form for changing your company’s tax status from S corporation to C corporation. Instead, it simply requires a written statement be filed with the appropriate IRS service center, along with consent signed by a majority (more than 50%) of your corporation’s shareholders.
The written statement can specify a date as long as it is not prior to the filing of the actual tax status reversal. If no specific date is listed, the filing becomes effective during the current tax year as long as the revocation is filed by the fifteenth (15th) day of the third month of the current tax year. If it is filed after that date, it becomes effective as of the first day of the following tax year.
Before making any changes to your corporation’s tax status, it is best to consult a tax professional, as tax professionals are experts in this area and thus best suited to advise on tax status matters.
Related Post: Filing S-Corp on a new Delaware Corporation
Source:
“Can I Change My Business From an S Corporation to a C Corporation?”
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There are 3 comments left for Why Convert Your Tax Status from S-Corp to C-Corp
David Myth said: Wednesday, October 4, 2023Great article! Very informative!
Babita Jagnanan said: Wednesday, December 30, 2020Hello, can you assist in registering a non-profit?
HBS Staff replied: Thursday, December 31, 2020Our team would be happy to assist. Typically, the first step is forming a non-stock corporation. More info here: https://www.delawareinc.com/what-is-a-non-profit-corporation/
Please reach out to our team at sales@delawareinc.com or use the Live Chat option on our website if you would like some additional assistance.
Mo said: Wednesday, April 18, 2018Is true or false if s Corp lien go to personal record if c Corp will not go to personal record In c Corp do I have to hike quarts or not necessary to file quarterly just file one time end of yrswhat advantage n disadvantage of both thanks
HBS Staff replied: Thursday, April 19, 2018That question is best answered by an accountant.