Many business owners are becoming interested in transforming their companies into S corporations.
Enterprises are entitled to a range of tax benefits by filing under Sub-chapter S of the Internal Revenue Code.
Most notably receiving a single level of tax, and substantial reductions on payroll taxes.
If you have an existing LLC, without even knowing it you may already meet the eligibility requirements. Incorporating with a S Corp provides many advantages.
Follow the steps described in this post to learn how to form a S corp with an established LLC.
1. Check Eligibility status
You must ensure you meet the eligibility requirements before applying to become a S corp.
You may already meet many of the current requirements as an existing LLC, without even knowing it.
By eligibility, this excludes all insurance companies, domestic companies or financial institutions operating internationally.
Your company only needs to produce one stock class.
Furthermore, you must have no more than 100 shareholders, all of whom consent to an election in the S corp.
Individual investors must be shareholders and not businesses, associations or non-residents.
You must also be prepared to adopt a consistent tax year, or have already been prepared to.
Remember the eligibility criteria associated with this when you prepare to turn the LLC into a S corp.
2. Fill out forms 2553 and 8832
Before you can formally transition your company you must fill out important documents with the IRS. Most notably, the Small Business Corporation’s election is Form 2553.
The agreement consists of four sections, which must be reviewed and signed by all of the company’s shareholders. Additionally, existing LLCs are required to fill out the Form 8832.
The form sets out how businesses are to be categorized for federal tax purposes.
As an current business owner, you need the form to validate your transition to the system.
This form must be prepared and submitted prior to the filing deadline for the S corp.
You must fill out the Forms 2553 and 8832 before you can start running a S Corp.
3. Revise your corporate bylaws
Revise your corporate bylaws after you have completed the necessary paperwork. Your By-Laws should specify how to operate your organization.
Dictate which shareholders are to make the corporate decisions.
Set procedures for naming directors, conducting meetings and notifying shareholders.
While State authorities do not need them, the bylaws will be relevant for future litigation purposes.
As you transition your company’s organizational structure, revising any discrepancies is often helpful.
Revise the company bylaws as you turn the firm into a S corporation.
4. Choose election date
To validate your move select the best election date. The date of the election is also the day the shareholders study and sign the Form 2553.
The voting itself needs to be held by a clear date that the IRS acknowledges.
The date must be within two months and fifteen days from the start of the tax year selected.
Within this, it can take place at any time during the preceding tax year before the transition.
Choose a date of election that meets IRS deadlines to confirm your S Corp formation.
5. Revise tax structures
Revising your existing tax structure is the final step in transitioning your business. S corps and LLCs are somewhat similar in tax structure.
S corps owners pass their net income to their shareholders or overall losses. There are however several distinctions between LLC vs S corps tax structures.
You also have to pay Social Security and Medicare taxes to yourself and your employees, if you own a S corporation.
The IRS requires you to provide yourself a ‘reasonable salary’ to avoid ducking tax requirements when you pay yourself.
Additionally, one of the main advantages of your revised tax structure is that you should avoid double taxation.
Owning a S corp, as a business entity you are not required to pay income tax, this protects you from a major disadvantage of ownership of the business.
Review your tax structure before starting operation of your newly formed S corp.
S corporations become a popular possession option for existing owners of LLCs. The eligibility criteria are already met by many existing business owners without even realizing it.
If you do, fill out forms 2553 and 8832 as required.
Refresh your corporate by-laws to conform to your established legal structure.
Pick your Transition Election Date. Review your existing tax structure, in addition.
Follow this post to learn how to shape an existing LLC company with S.