S Corp to C Corp Conversion: What Is Required?

Shoshana Jackson
Categories : Entrepreneurs ,Business
Tags : Office entrepreneurs topics business law

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Many new business owners elect to become an S Corporation due to the tax benefits. But when a corporation seeks to increase the number

of shareholders, usually as a way to raise capital, the limitations of an S Corporation will require a change in structure. Although this a situation that can be executed with little difficulty, it is always advisable to consult an experienced tax advisor to determine the tax implications, both positive and negative.

While the S Corporation election requires the approval of all shareholders, only the majority is needed to revoke that status. A statement of consent must be signed by shareholders. These shareholders must collectively own more than 50 percent of the issued and outstanding stock. The IRS will not approve the revocation of an S Corporation without the majority approval.

Statement of Consent

The statement of consent1 to revoke an S Corporation election can be as simple as a letter written on company letterhead signed by the corporate officer. The heading for this letter should be titled “Revocation of S Corporation Election.” It must state that the corporation is revoking the S Corp election made under Section 1372(a) of the Internal Revenue Code. This letter must include the name and EIN number of the corporation, the tax year the revocation will be effective, and the number of stocks issued and outstanding.

Stockholder’s Statement of Consent

The Stockholder’s Statement of Consent needs to be signed and submitted with the Statement of Consent. For each shareholder approving of the revocation this statement needs the following information: name, address, social security number, number of shares held, and each signature. The total number of shares must equal more than 50 percent of the shares issued and outstanding, including non-voting shares.

Effective Revocation Date

For the revocation to be effective for the next taxable year, the statement of revocation must be submitted to the IRS by the 15th day of the 3rd month of that taxable year. For a 2011 corporate tax year that begins on January 1, the revocation would need to be submitted by March 15, 2011, in order for it to be effective for that year. Any revocations filed after that date would be effective for the next tax year.The corperation can also specify another date. This date can be on or after the date the election revocation is filed.

Submitting the S Corporation Revocation to the IRS

Mail the Statement of Consent and the Shareholder’s Statement of Consent to the IRS Service Center designated for the Corporation’s location. The statements should be sent Certified Mail Return Receipt Requested. This will provide proof that the revocation was sent. The Service Center will process the revocation and notify the corporation’s representative if the election termination was approved. Upon approval the corporation will revert back to its original C Corporation status.

Revocation of State Corporate Status

Although most states automatically recognize the termination of S Corporation status when filed with the IRS, some do not. A few states require filing a separate revocation. Check with the state tax department to determine if a separate election is needed.

Sources:

LeapLaw.com. Consent of stockholders for S revocation. Retrieved at https://www.leaplaw.com/pubSearch/preview/s_revocation.pdf.

IRS.gov

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