How to Convert to S Corp From Sole Proprietor

By John Cromwell

A sole proprietor may benefit from converting to an S Corporation. While a sole proprietor is personally liable for business debts, shareholders of an S Corporation are not liable for the corporation’s liabilities. Neither business structure pays income taxes directly; instead, sole proprietors and S corporation shareholders both declare income earned by the business on their personal tax returns.

Step 1

File for corporate status. To qualify as an S corporation, a business must first incorporate. Incorporation requirements vary, depending on the state where the business is located. Generally, to incorporate you must choose individuals to serve on the board of directors; check the availability of your corporation’s name in your incorporating state; draft articles of incorporations and bylaws; file the relevant documents with the Secretary of State where your business is located; and open a separate bank account for the corporation.

Step 2

Apply for an Employer Identification Number (EIN) if you do not have one. An EIN is a federal tax identification number that every corporation must have, whether or not the business plans to hire employees. A corporation can obtain its EIN immediately by applying online through the IRS website. An EIN can also be obtained by calling 800-829-4933 or by faxing or mailing a completed Form SS-4 to the IRS. The instructions for Form SS-4 will tell you where to fax or mail your completed form.

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Step 3

File for S corporation status with the IRS. You must file a completed Form 2253 with the IRS to be recognized as an S corporation. The form must be filed within two months and 15 days from the beginning of the first year when the business is to be treated as an S corporation.

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How to File an S Corporation in California

To form a corporation in California, you must register with the California Secretary of State. However, California does not register corporations as "S corporations" -- S corporation status is a taxation category established under the federal Internal Revenue Code. Once California has established your corporation, you may apply for S corporation status with the IRS. S corporation status offers income tax advantages to small businesses. However, not all companies qualify for S corporation status.

How to Form an S Corp in Florida

Creating an S corporation is a two-step process. First, the business must incorporate according to the laws of Florida as a regular corporation, commonly known as a C corporation. Then you change the C corporation to an S corporation by making a special tax election with the Internal Revenue Service. Businesses choose to elect S corporation status for income tax purposes.

How to Convert an S Corporation

S corporations elect to pass corporate income, losses, deductions and credit through to their shareholders for federal tax purposes. An S corporation is taxed under Subchapter S of the Internal Revenue Code, meaning that the corporation pays almost no federal income taxes. If a corporation qualifies for S corporation status, it may obtain S corporation tax status by filing Form 2553 with the IRS. In some cases, however, it may be advantageous to revoke S corporation status -- for example, if the company wishes to add shareholders so that the number of shareholders exceeds 100, it would no longer qualify for S corporation status.

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