USA Opened LLC, became S Corp. Can I convert back to LLC?

[ag_cpa.office]

My client opened an LLC, then chose to become an S Corporation. They had very little activity, no tax returns filed yet. They want to become an LLC - Partnership now.

Can they do that now? Is there a way to convert? Or do they need to close the corporation and open a brand new corporation?

Thank You,
Jay

 

[ColinCPA]

This process is not as simple as going from C-corp to S-corp or partnership to S-corp. My understanding is that you will need to liquidate the corp and sell the assets to the new partnership entity. The rules on this from state to state vary quite a bit. You may or may not have taxable gain on the transfer in different scenarios. Or, you could leave the assets in the S-corp and have it acquire a minimal share of the new partnership.

Why do they want to pull the plug on the S-corp so quickly? Are they daunted by keeping up with payroll? Get them on Paychex or another provider and make it easy.

 

[ag_cpa.office]

The reason is because one of the investors is an LLC and that is not allowed under an S Corp. I found this link and got some good information. Hopefully it will help someone in the future.

assetlawyer.com/legal-blog/2009/06/08/protecting-business-interests-how-to-protect-subchapter-s-corporations/?]Protecting Business Interests: How to Protect Subchapter S-Corporations? - Asset Lawyer

I think the best way to go about this is to file a revocation of S Election to the IRS and then file Form 8832 to switch to an LLC. Would you agree?

 

[ColinCPA]

No, I don't exactly agree. Going from S-corp to partnership (LLC or not) requires revocation of S-corp status, dissolution of the corporation, and transfer into a new entity. I'm pretty sure you can't just 8832 your way back to a partnership with no transaction taking place.

Since the corporate entity was never eligible to be taxed as an S-corporation (assuming the LLC had an interest on day one), the Form 2553 S-election was invalid on day one. Therefore, I think you need to file Forms 1120 and a short year 1120 for this year or next. Then, you file to dissolve the entity and sell the assets into a new LLC, electing to be taxed as a partnership.