As a company grows, the business environment changes and other factors impact how the company operates, there may come a time when the business structure is no longer conducive to the company’s goals. Over time, a form of legal organization that once suited the business and was conducive to its goals may come to work against these interests. It is important to note that in most cases where practical tax and business considerations allow, it is possible to convert your company’s form of organization to better suit the organization’s current and emerging goals. The business tax lawyers, CPAs, and financial professionals at the Tax Law Offices of David W. Klasing can provide strategic guidance to align your business structure with your organizational goals.
As a threshold question, one must first determine whether the laws of the state of California permit the conversion of a domestic (California) stock corporation to other forms of entity organization recognized in the state. As a general rule, A domestic stock corporation can convert into another recognized California business entity. Likewise, a California limited liability company (LLC), limited partnership (LP) or general partnership (GP) can convert into a California or foreign other business entity. Similarly, provided that the laws of the foreign jurisdiction allow for it, a foreign corporation can convert to a California corporation. However, the exception is that a California corporation cannot convert to a foreign entity.
For federal tax purposes, the only requirement that is set forth to convert a C corporation to an S corporation is completing and filing Form 2553 with the IRS to change the tax election. Requirements regarding the completion and filing of IRS Form 2553 include that:
Form 1120S should be filed for the tax year in which the S corporation election is made.
When converting a California C Corporation to a California S Corporation, the biggest difference individuals will need to understand is a tax election. Technically all California corporations are initially formed as C corporations. It is only after the articles of incorporation have been filed, the bylaws enacted, shares issued, and the initial shareholders hold the first shareholder meeting that a newly formed California C corporation can elect to be treated as an S corporation by filing IRS Form 2553. If an S election is not made and filed within approximately 45 days of incorporating, the corporation will remain a C corporation until Form 2553 is filed. There does not appear to be additional filing requirements with the California Secretary of State.
Additional tax compliance and other considerations that should accompany any decision to convert a C Corp should include:
The above represents only some of the considerations that should be addressed prior to converting a C Corp in California. Speak to an experienced tax attorney or CPA prior to engaging in any substantive actions regarding your business and its form of legal organization.
At the Tax Law Offices of David W. Klasing our attorneys, CPAs, and financial professionals can help your business address difficulties incurred due to an array of tax or financial concerns. If your company has undergone changes and its form of organization is a drag on your goals, we can assess whether organizations such as a C Corp, S Corp, LLC, or another form is more likely to be conducive to your goals. To schedule a confidential reduced rate consultation, call the Tax Law Offices of David W. Klasing at 800-681-1295 today.