Converting an "S" Corporation to a "C" Corporation

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.

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:

  1. That the corporation is revoking its choice to be treated as an S Corporation under Sec. 1362(a) of the Internal Revenue Code.
  2. 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.)
  3. The date on which the revocation is to be effective, if a specific date is required.
  4. 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, is here to help.