Conversion of C Corp to S Corp

by Christopher Carter - Updated September 26, 2017

Converting a C corporation to an S corporation helps the owners of the business avoid double taxation on the company's income. C corporations have to pay taxes on the company's net income as a business entity, but S corporations do not pay taxes on company income at the entity level. A C corporation that converts into an S corporation must adhere to certain ownership restrictions and size guidelines.

Significance

C corporations with more than 100 shareholders cannot convert to an S corporation. Furthermore, a C corporation cannot convert to an S corporation if the company has other corporations, limited liability companies and partnerships as shareholders of the company. Shareholders of the converting C corporation must have United States citizenship or status as a resident alien. The company cannot get status as an S corporation if a foreign entity has an ownership interest in the business.

Considerations

A C corporation that has locations outside the United States cannot convert to an S corporation. If the company receives more than 95 percent of its gross income from exporting, the business cannot convert to an S corporation, as explained by the Reference For Business website. Furthermore, A C corporation cannot convert to an S corporation if the business is established as an insurance company or a financial institution. C corporations that have had S corporation status in the last five years cannot convert the business.

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Tax Issues

Once the company's S corporation status gets accepted by the Internal Revenue Service, the shareholders of the business get to pass their share of company losses and profits directly to their personal income tax return. However, the company must file its final corporate tax return as a C corporation, Form 1120, with the IRS by the due date. The converted entity must file its initial S corporation tax return by the due date provided by the IRS. S corporations must file Form 1120S, which exists as an informational tax return indicating each shareholder's ownership interest in the business.

Form 2553

C corporations have to file Form 2553 with the IRS to convert to an S corporation. The IRS website allows business owners to print Form 2553. Form 2553 requests information about the business such as the date of incorporation, the nature of the company's business activities and must include the signature of each shareholder. A notification letter gets sent to inform the company of its S corporation status. The company should contact the IRS service center where the form was sent if it has not received notification within 60 days.

About the Author

Christopher Carter loves writing business, health and sports articles. He enjoys finding ways to communicate important information in a meaningful way to others. Carter earned his Bachelor of Science in accounting from Eastern Illinois University.

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