Can I convert an S Corporation to a C Corporation?

You can convert an S corporation to a C corporation.

Let me issue a caution though: You want to convert from an S corporation to a C corporation only after having your tax advisor calculate the change in taxes that result from the conversion.

Two Approaches for Conversion

Okay. You have a couple of approaches available for converting an S corporation to a C corporation.

You can, for example, do something that causes the S corporation to lose its eligibility to be an S corporation. For example, you could sell one share of stock to an ineligible S corporation shareholder. Or you could create a second class of stock--for example, preferred stock.

You can also officially revoke the S status by filing a statement of revocation with the Internal Revenue Service.

Instructions for S Status Revocation

If you want to revoke a previously-made S election, you file the revocation statement with the IRS service center you've been sending your S corporation income tax return to.

For example, if you usually file your S corporation tax return with the Ogden service center in Utah, you send your S corporation revocation to Ogden.

To intentionally revoke the "S" status of an S corporation, a majority of the S corp's shareholders need to agree to revoke the "S" status. If you have shareholders residing in community property states (such as Washington or California, to name two) and these shareholder's shares are counted as part of the majority, these shareholder's spouses should agree to the revocation, too.

Currently, the IRS doesn't have a form for making the revocation. But you can create a revocation statement yourself or with a tax practitioner's help. The statement should include the number of shares outstanding at revocation date; the name, address and employer identification number of the S corporation; and the effective revocation date. The person who usually signs the S corporation income tax return should sign the statement.

One final comment: You may (or may not) get an acknowledgement letter.

 

Additional Information You May Find Useful

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