When you convert an S corporation to an LLC, you will no longer be taxed as an S corp. Instead, you will be taxed according to the tax structure of an LLC.
If the S Corp’s assets have increased between the formation of the business and the conversion to an LLC, shareholders must pay capital gains tax. This can be a significant tax event because, upon conversion, essentially all the S corporation’s assets are deemed to be sold at fair market value.
Simply converting the S corporation into an LLC taxed as a partnership triggers a tax on the liquidation of the corporation. These headaches can be avoided by using an S corporation inversion. The LLC structure is more flexible than a corporation, allowing for a greater variety of management structures and profit distributions.
Capital Gains Tax
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Operational Flexibility and Asset Transfer Considerations
Both S Corps and LLCs offer limited liability. The advantages of LLCs include flexibility in terms of the company’s operations, fewer formalities, and additional options for managing and oversight of the business. Therefore, many S Corps wish to convert to LLC for such benefits.
Converting an S Corp to an LLC can enable your business to access greater flexibility in how the business is structured and how profit is distributed to members. However, you should note that you’ll have to pay corporate taxes when you transfer the assets of the old S-Corp to the new LLC.
In summary, converting an S-Corp to an LLC provides more flexibility in business operations. However, one must consider the tax implications especially if the S-Corp assets have appreciated substantially. With proper planning, an S-Corp to LLC conversion can benefit your business.
Conversion Process and IRS Notification
Once you convert your business from an S-corp to an LLC, you will need to inform the IRS. Depending on your state, this conversion can be completed by forming a new LLC and merging the S-corp into the new business structure.
Name Availability for New LLC
The first step to take when changing from a sole proprietorship to an LLC is to confirm your business name is available for an LLC. Just because you used the name as a sole proprietor doesn’t mean the name is available for an LLC.
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In summary, the S-Corp to LLC conversion can offer operational advantages but requires careful consideration of tax implications.