Step 1-Check S Corp Eligibility
The first step in converting your LLC into an S-Corporation through an IRS tax status election in Philadelphia is to make sure that the corporation meets the Philadelphia S Corp registration requirements to qualify as a Small Business Corporation. There are certain restrictions to S-corporation status. Generally, all members of the LLC must consent to S-Corporation election. There can be no more than 100 shareholders and the company can only have 1 class of stock. Lastly, all shareholders must be US citizens or resident aliens. Once it is determined that the S-corporation does not violate any of these restrictions, it is safe to begin to convert your LLC.
Our team of attorneys will walk you through every step necessary from start until finish, including how exactly these state specific entities are set up in various states – no two regions operate precisely alike despite sharing similar characteristics.
Step 2-Check Form 2553 Due Dates
For the election to be in effect for the current tax year, the PA S-Corporation election must be filed within 2 ½ months from the beginning of the formation year. For example, if the corporation’s formation year begins in August, the election must be made by November 15 of that same year.
Generally, S corporations are required to adopt a calendar year fiscal year. With IRS consent, it may adopt a non-calendar year fiscal year (a tax year that ends on a month other than December) if it establishes a valid business purpose for doing so. The valid business purpose must not result in a deferral of income to shareholders but must coincide with a natural business year. A natural business year may end with or after the end of the peak period of a cyclical business. A natural business year is also defined as a year in which over 25% of gross receipts occur in the last 2 months of the proposed year over a 3-year period.
An example of a fiscal natural business year would be a Halloween Costume store in which more than 25% of its gross receipts occurs in September and October (i.e., due to the holiday). The S corp tax return is due on the 15th day of the 3rd month of the fiscal tax year.
Step 3- Complete and File Form 2553
An S-Corp can help cushion the burden of tax liability and limit personal liability when converting from an LLC to an S corporation. Personal liability protection takes place in both entities (Limited Liability Companies and S Corporations) because the owners are not held liable in most torts committed by the S Corp or LLC, i.e., they cannot be sued individually for the entity’s conduct. Only the corporation or LLC itself is liable. Generally, both are taxed the same way as well, i.e., income, losses, deductions, and credits flow through to the individual tax return.
The pass-through taxation of S corporations has made this type of corporation one of the most popular types of business entities in the United States. Unlike other regular “C” corporations, the income of S corporations is not taxed at the corporate level, but it is passed through to the corporation’s shareholders. S corporation status is often elected by smaller closely-held corporations. The loss of the S corp is passed on to the shareholders of the corporation , who may use it to offset their other income.
The S corporation must file an election for S Corp taxation (or make a tax choice) to be treated as an S Corp for tax purposes on the correct filing of Form 2553, “Election by a Small Business.” How to convert an LLC to S corp stands or falls on filing a single form. The S corporation has the limited liability feature of the C Corporation but the tax status of a partnership, where the income is not taxed at the corporate level but is taxed to the shareholders when earned.
Benefits of forming an S Corp include:
If you need help converting an LLC to an S-Corp in Philadelphia, please contact our experienced lawyers. We can also represent you before the IRS. If you are to the point of converting LLCs to S-Corps, call now.