There are many advantages to forming an "S" Corporation when starting a business. In fact, many companies elect to be treated by the IRS as S Corporations to take advantage of the "pass-through" aspects of the tax law. The potential tax benefits are so great that even existing corporations, if they qualify, can elect to be treated as an S Corporation. (To learn more about Pass-through taxation, click here.) [Link to LC Section 4]
As a company grows, it may "outgrow" its ability to remain an S corp and therefore seek to convert from an S Corporation to a C Corporation. There are numerous reasons to convert, an example of which could be to take advantage of a more elaborate benefits plan for its employees. Other potential advantages of a C Corporation include the high number of Shareholders the company can have (there are a maximum of 75 shareholders for an S Corporation), or the ability to name foreign nationals or other entities, such as corporations, as shareholders.
We have been asked many times over the years about the procedure to convert from an S Corporation to a C Corporation. The IRS reports that there is no official form to facilitate the conversion and therefore, the company wishing to convert must send a letter to the IRS stating the following:
- That the corporation is revoking its choice to be treated as an S Corporation under Sec. 1362(a) of the Internal Revenue Code.
- The total number of shares of stock that the company has (including nonvoting stock which has been issued and is outstanding at the time the revocation is made.)
- The date on which the revocation is to be effective, if a specific date is required.
- The name, address and taxpayer identification number (EIN) of the corporation.
If your company has grown to the level that you need to consider converting from an S to a C corporation, StartABusiness.com is here to help.