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Why Should You Revoke an S Corp Election?
Although S corp status has several advantages for limited liability companies (LLCs) and C corporations (C corps), including potential tax savings and easier transfer of ownership, there may come a time when a company wants to revoke its S corp election. This may occur for a number of reasons, including:
- Changes in the tax laws, such as the Tax Cuts and Jobs Act of 2017
- The limits on the number of shareholders an S corp can have (100)
- Taxes on funds not distributed to shareholders
- Need for more outside investment
- Desire to limit shareholder participation in management
Tax Cuts and Jobs Act of 2017
Whether S corp status will save your company money on taxes depends in part on the corporate tax rate, which the Tax Cuts and Jobs Act of 2017 significantly reduced. As a result, your taxes may be lower if you convert to a C corp even though you will be “double taxed” at the corporate and individual levels.
Limits on the Number of S Corp Shareholders
S corps are limited to 100 shareholders. Although this may not be an issue for your company, any company with more than 100 shareholders must revoke its S corp status.
Taxes on Funds Not Distributed to Shareholders
Sometimes a company may choose not to distribute part of its profits so that it can reinvest them in the business. S corp owners will have to pay taxes on these profits, but LLC owners and C corp owners only pay taxes on profits that they actually receive as distributions.
Need for More Outside Investment
The 100-shareholder limit for S corps means that they can’t raise money through an initial public offering. Moreover, venture capitalists can’t legally purchase S corp shares. For these and other reasons, it is generally only possible for a C corp to attract outside investment.
Desire to Limit Shareholder Participation in Management
C corp shareholders can only elect directors and vote on major structural changes in the company. By contrast, S corp shareholders have much more input into management decisions.
How Do I Revoke an S Corp Election?
To revoke S corp status, a company must:
- Conduct a vote of all shareholders
- Send a letter of revocation to the IRS
- Include a statement of consent from all shareholders
- Fill out Form 8832
Conduct a Vote of All Shareholders
The shareholders owning more than 50% of the S corp’s stock must agree to revoke S corp status for the revocation to be valid.
Send a Letter of Revocation of S Corporation Election
To revoke S corp status, the company must send a letter to the IRS requesting the revocation. The letter must be signed by all shareholders who agreed to it.
According to the IRS, the letter should state that the corporation revokes the election made under Section 1362(a). Generally, it should also provide the:
- Names and addresses of the shareholders
- Taxpayer identification number of the shareholders
- Number of shares of stock owned by the shareholders
- Date or dates on which the stock was acquired
- Date on which the shareholder's taxable year ends
- S corp’s business name
- S corp’s Employer Identification Number (EIN)
- Election to which the shareholder(s) revokes
Finally, the letter should indicate the effective date of the revocation (or prospective date) and be signed by the person authorized to sign the company’s tax returns.
If an LLC wants to revoke its S corp status, its letter of revocation will be somewhat different, but in general, it might include:
- A statement that the LLC is revoking its S corp election under Section 1362(a)
- The LLC’s name, mailing address, and EIN
- A list of all of the LLC’s owners and their percentage of ownership
- A designation of which taxable year the S corp revocation should take effect
Attach a Statement of Consent From All Shareholders
If your company was an LLC and you want to revert to LLC status, you must attach a statement of consent to the letter of revocation. This statement indicates to the IRS that all of the LLC’s members agree to the revocation and must include:
- The LLC’s name and EIN
- A statement that all of the members consent to revoking the S corp status
- The members’ names, mailing addresses, Social Security numbers, percentages of ownership, and the dates they became owners
- The end dates of the members’ tax years
File IRS Form 8832
S corps that revoke their S corp elections are automatically taxed as C corps. If you desire another tax status, you need to file Form 8832. Specifically:
- A single-member LLC can use Form 8832 to tax the company like a sole proprietorship.
- A multi-member LLC can use Form 8832 to tax the company like a partnership.
What to Do After You’ve Revoked Your Company’s S Corp Status
After you file the paperwork to revoke your company’s S corp election, we recommend you consider whether to distribute your S corp’s profits before the election takes effect. This is because S corp distributions are only taxed at the shareholder level on individual income tax returns, while C corp distributions are taxed at both the corporate and shareholder levels.
Even if you didn’t distribute your S corp’s profits before the revocation became effective, you might still be able to make the distribution tax-free at the corporate level if you do so in cash within one year of the revocation’s effective date.
These issues and their tax implications are complex, so talk to an attorney or tax professional for advice about your specific situation.
Other tax statuses your business can take advantage of
If your company is no longer an S corp, there are other tax statuses it may be able to take advantage of, depending on the circumstances. These include as a C corp, sole proprietorship, or partnership.
All of these have advantages and disadvantages. Talk to an attorney to determine which one is right for your business.
Revoking S Corp Status Frequently Asked Questions
How do I revoke my S Corp status?
To revoke your S corp status: you must conduct a vote of all shareholders, send a letter of revocation to the IRS, include a statement of consent from all shareholders, and fill out Form 8832.
What happens when an S Corp terminates?
When an S corp is terminated, the company reverts to C corp status unless it is eligible for another tax status, such as a partnership or sole proprietorship, and the owner requests that status from the IRS.
Can you convert S Corp to C Corp?
Yes, you can convert an S corp to a C corp by voluntarily revoking its S corp election. Although the revocation can be made at any time, if you want it to be effective on the first of the corporation’s tax year, the IRS must receive your revocation letter by the fifteenth day of the third month of that tax year.
How many shareholders can an S corp have?
S corps can have between 1 and 100 shareholders (also called “owners”).