Electing S status by an LLC.

• Author: Markwood, Linda
• Position: Limited liability company

An existing entity (such as a limited liability company (LLC) classified as a partnership) can elect under the check-the-box rules to be classified as a corporation. If the election is made, the entity is deemed to transfer all of its assets and liabilities to the corporation in exchange for the corporation's stock. The entity is then deemed to distribute the corporation's stock to its owners in complete liquidation (Regs. Sec. 301.7701-3(g)(1)). The deemed transfer to the corporation is tax-free, assuming Sec. 351(a) applies and the LLC's liabilities do not exceed the basis of its assets (Sec. 357(c)).

An LLC or other entity that has filed a check-the-box election to be taxed as a corporation can elect S status if the entity and its shareholders meet the S corporation eligibility requirements (Regs. Sec. 1.1361-1(c); see also Regs. Sec. 301.7701-3).

Deemed election to be treated as a corporation

An LLC that is eligible to elect S status and timely files an S election (Form 2553, Election by a Small Business Corporation) is considered to have made the election to be taxed as a corporation (Regs. Sec. 301.7701-3(c)(1)(v)(C)). These entities are not required to file Form 8832, Entity Classification Election. Other entities file the election to be taxed as a corporation on Form 8832 in accordance with Regs. Sec. 301.7701-3(c).

Under Regs. Sec. 301.7701-3(c), the effective date of the classification election specified on Form 8832 cannot be more than 75 days prior to the date on which the election is filed and cannot be more than 12 months after the date on which the election is filed. This means that the classification change can be retroactive for up to 75 days before the Form 8832 is filed. Under the S corporation rules, however, a newly formed corporation must file the S election on or before the 15th day of the third month following the activation date of the corporation, which is the earliest date that the corporation: (1) has shareholders; (2) acquires assets; or (3) begins conducting business. If the entity plans to make the election to be treated as a corporation and become an S corporation on the same date, only Form 2553 is filed, and it should conform to the S corporation rules. The authors recommend that the Form 2553 be filed by the earlier of 75 days or two months and 15 days after the date the S election is to become effective. In this way, the Form 2553 will be filed within both the Form 8832 and Form 2553 filing limits.

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