Many entrepreneurs find that their business outgrows its original structure (or perhaps grows in a different direction). One common example is LLCs that approach outside investors for funding: many times, the investors will require that the LLC convert to a Delaware corporation, in large part due to the favorable legal climate in that state. Conversely, many business owners who started out as a C-corporation may discover that the structure is too unwieldy and complex for their relatively simple operation.
So, what’s a business owner to do? Dissolve the business and start all over again? Perhaps, but mercifully, this isn’t always necessary. Many states provide a mechanism by which entities can change structure with the filing of a document or two. Some states even provide a relatively simple process by which an out-of-state entity can change its structure and move to a different state. (In Delaware, for example, an out-of-state LLC can “domesticate” to Delaware and also convert to a C-corporation with a single filing.)
Of course, the S-corporation is a different animal. If you’re looking to elect S-corporation status for your corporation or LLC, you can do so within two months and fifteen days after the entity has been created. If you don’t elect S-status during that time, don’t fear: you get another bite at the apple at the beginning of every subsequent tax year. So if your company follows a standard tax year (ending December 31), you can elect S-corporation status anytime before March 15 of the following year. If you want to switch from an S-corp to a C-corp, you can do so by notifying your local IRS center that you are revoking your S-corp status (and obtaining the consent of at least 50% of shareholders).
As is the case for almost everything else, changing from one entity to another is complicated, and involves lots of not-so-simple questions: will you need to change your EIN number? Are there tax considerations you’re not taking into account? Will you need an action by written consent or other formal paperwork signing off on the change? Whenever possible, it’s a good idea to get legal counsel before changing the structure of your business.
By the same token, it’s a good idea to make sure that changing your structure is the right choice. There could be an advantage to keeping your current structure, or another structure that you haven’t considered. Getting advice on these issues upfront will give you peace of mind and a clear path forward.