Question

Brighton, Inc. is currently a C corporation. Brighton has 10 shareholders and has substantial amounts in retained earnings from previous years. Brighton’s officers are considering becoming an S corporation. Describe the process Brighton will need to undertake to become an S corporation and list the advantages and disadvantages of this change in business form.

Answer 1

Conversation process for Brighton, Inc to become an S corporation from C corporation:

1. If we want convert from C corporation to S corporation then first we need to file Form No 2553 with the Internal Revenue Service.

2. All shareholders must sign the form in this case all 10 shareholders of Brighton , Inc sign the form 2553.

3. The form 2553 must be submitted to internal revenue service within 2 months and 15 days from the date of beginning of the tax year which S corporation election is done.

4. C corporation pay taxes on all previous year retained earnings and distributed to the C corporation shareholders after payment of tax and also any dividend paid to the shareholders are taxable in the hands of those shareholders.

Advantages for conversation from C corporation to S corporation:

1. Major advantage of the conversion is pass through taxation. This avoid double taxation.

2. Salary and dividend payments from the corporation leads to lower tax bill.

3.Ease of conversation , if owners want to convert from Limited liability corporation to C or S corporation.

Disadvantages for conversation from C corporation to S corporation:

1. Tax compliances and consequences for conversation.

2. Corporate formalities for the S corporation which are imposed by state corporation statue.