If you are a business holder, who is planning to change a Limited Liability Company (LLC) to an S Corporation (S Corp) in California, you are definitely at the right place. The process of converting from LLC to S Corp is pretty simple however the decision to do so may be baffling for some business owners. Before we move to the pros and cons of this decision it’s crucial to comprehend how your business will transform after turning towards S Corp tax status.
Difference Between LLC and S Corp
Before you proceed to how to change LLC to S Corp, you should be aware of the differences between both. A Limited Liability Company is a sort of business thing while an S Corporation is a sort of tax status. To make it simpler, if you are converting an LLC to an S Corp, you are sustaining the same basic business structure with some variations. But here you are requesting the Internal Revenue Service (IRS) to tax your business as an S Corporation not as an LLC.
In other words, a single-member LLC by default functions similarly to a sole proprietorship. It profits from pass-through taxation. That means all revenues earned by the business are inevitably passed through the personal tax return of the business owner in the form of self-employment tax. As there is no corporate tax rate, you do not have to worry about double taxation. Notably, both LLCs, as well as S corps, are still subjected to the minimum franchise tax ($800) of California, which means you still have some corporate tax obligation.
The key difference between an LLC and an S Corp in California is the LLC fee and S Corp tax. The S Corporation tax depends on the net-taxable profits while the LLC fee depends on the annual gross receipts in California. Although the tax advantages of converting to an S Corp can be noteworthy, it requires a lot of legal formalities.
Is It Beneficial to Change LLC to S Corp in California?
Well, whether you should convert to an S Corp or not depends on the structure, dimensions, and goals of your particular business. However, both LLCs and S Corporations share many similar features.
These features include:
- Both S Corps and LLCs get the advantage of pass-through taxation in California excluding a few states.
- Both businesses can add integrity and legality to a small business operation.
- Both have precise filing demands however for an S Corp the filing necessities are much stricter.
- Both have limited liability protection. It means that the business holders, shareholders, and employees are not personally accountable for the debts or liabilities of the company. This rule involves a few legal exceptions.
Standards for Launching S Corp in California
If you want to establish an S Corporation or change LLC to S Corp in California your company must fit the following standards:
- An S Corporation cannot have more than 100 shareholders.
- An S Corp cannot hold more than one class of stock.
- The shareholders of an S Corp must be legal US citizens or legal residents.
- All shareholders must be eligible trusts, estates, or individuals, other partnerships or corporations are not considered as shareholders.
Moreover, certain LLCs do not fit the criteria of an S corporation tax structure. These include insurance companies, financial institutions, and international sales corporations.
How To Change LLC to S Corp in California
The good news is, that California has simplified the statutory conversion procedure. Some states will ask you to create a distinct corporate entity and then change your LLC assets. On the other hand, California offers a smooth process to transfer all your liabilities and assets with just a single statement of conversion and new Articles of Incorporation.
As you meet the eligibility criteria, you have to follow the below-mentioned steps to switch to an S Corporation:
Accomplish the incorporation requirements:
- Carefully outline the corporate bylaws
- Pick corporate officers and assign corporate directors
- Release stock certificates
- Organize the initial board meetings
Create a conversion plan adhering to the terms of CA Code Section 17540.3 that should include:
- The new S Corporation’s name and place
- All the terms and conditions of conversion
- The requirements in the Articles of Incorporation (shareholders will be bound to these)
- Any other requirements or agreements required for your business
Once you are done with the initial steps, it is time to move forward:
- Take the signatures of existing LLC members on the plan of conversion. Usually, California laws demand the plan to be approved and signed by mainstream members though there may be exceptions to the rule.
- File a statement of conversion along with new Articles of Incorporation. You can make use of the Form CONV LLC-GS or create your articles with the California Secretary of State.
- To submit the new Articles of Incorporation you have to pay the filing fee ($150). For submitting in-person paperwork you have to pay a counter drop-off fee ($15). Moreover, if you want to fast-track your application you can opt for expedited service paying an additional fee.
- Within 90 days of submitting the Articles of Incorporation, you need to file a Statement of Information. It includes the basic information of your corporation including the members, directors, officers, directors, contact, and address, and should be submitted to the Secretary of State. Every year you must submit a new Statement of Information.
- Complete IRS Form 2553, Election by a Small Business Corporation, and submit it to the IRS for federal tax purposes.
Once the above-mentioned steps are done, the conversion is complete so your corporation must follow the general guidelines that apply to a California S Corporation. These rules and requirements include:
- Conducting director’s meetings and shareholder’s meetings.
- Upholding a record of all major decisions from company directors and shareholders.
- Submitting a new Statement of Information every year.
Convert Your LLC into an S Corporation Status
As the question “How to Change LLC to S Corp” has been answered and explained, we hope you can take your decision without any confusion. Shifting from an LLC to an S Corporation status may not be the right decision for every business holder, however, it can be a brilliant decision if you want to enhance your corporate membership or avail irresistible tax advantages.
Eric M Hunt CPA is exceptionally specialized in helping businesses through this transition. If you have decided to switch from LLC to S Corp we sincerely recommend taking advice from experienced tax and legal experts. We can extensively help you with legal and financial matters and navigate through the intricacies of statutory conversion.
Our CPA experts will make sure that the conversion process is smoother and faster ensuring that your corporation is legally perfect and composed for excellent benefits and maximum success.
