How to Terminate an S Corp Election and Revert to an LLC

by
How do you terminate an S Corp election and revert to an LLC?
Once the election is canceled, the company reverts to an LLC that is taxed as a regular corporation. Vote to terminate the S corporation election. Prepare a statement of consent to terminate the election. Prepare a letter to the IRS, terminating the election.
Read more on smallbusiness.chron.com

A common business structure for small business owners is a S corporation, or S Corp, as it combines the tax advantages of a partnership with the legal protections of a corporation. An S Corp might eventually seek to return to its previous LLC status, nevertheless. This is possible, but it takes meticulous preparation and execution.

A S Corp may own another S Corp.

Unable to own another S Corp, a S Corp cannot. This is so that a S Corp may function properly, which includes having no more than 100 shareholders and only one class of stock, among other ownership requirements. These conditions would be broken and a S Corp’s S Corp status would be terminated if it acquired another S Corp.

What Might Cause a S Corporation to Be Inadvertently Terminated?

There are a number of reasons why a S Corp can unintentionally lose its tax-exempt status. Failure to meet the eligibility conditions, such as going over the 100 shareholder cap or issuing a second class of shares, is one frequent cause. Failure to submit appropriate tax returns or pay taxes on time could be another factor. Accidental termination can have severe repercussions, such as the loss of tax advantages and the requirement to submit a reinstatement request to the IRS.

Which of the following results in the S corporation status being terminated?

The loss of S Corporation status may result from a number of circumstances, including: Failure to meet eligibility conditions, voluntary revocation of S Corporation status – Accidental termination – No longer existing as a legal entity – The 10-year S Corp election term is coming to a close.

How Do I Dissolve a S Corp with the IRS Keeping This in Mind?

You must first file Articles of Dissolution with the state where your company is incorporated in order to dissolve a S Corp with the IRS. You need to submit a final tax return to the IRS and settle any unpaid taxes when the state confirms the dissolution. By submitting Form 966, Corporate Dissolution or Liquidation, you must also inform the IRS of the dissolution. The last step is to distribute any residual assets to shareholders and submit the business’s final tax return.

In conclusion, it is technically possible to cancel a S Corp election and change back to an LLC, but doing so takes meticulous preparation and execution. You must make sure you meet all eligibility standards in order to prevent unintentional terminations. To avoid any financial or legal repercussions if you do decide to dissolve your S Corp, be sure to fulfill all required processes with the state and the IRS.

FAQ
People also ask how do you revoke an election?

The company’s shareholders must hold a meeting and decide to end the election in order to rescind a S Corp election. A majority of shareholders holding at least 50% of the outstanding shares of the corporation must approve the vote. The business must subsequently submit Form 1120S to the IRS informing it of the termination. Additionally, in order to opt to be regarded as an LLC for tax purposes, the corporation must submit Form 8832.

Leave a Comment