1. Disregarded Entity Tax Status
2. Avoiding Income Taxation at the Entity Level
3. Selection of Federal Tax Classification
4. Differences between Mergers and Conversions

To convert S corp to single member LLC involves the conversion of a state law corporation to a limited liability company with only one owner. It doesn't mean that your EIN is automatically retained (i.e. carried over to the LLC). The IRS only reassigns a corporation's EIN to the successor LLC…only in certain situations.

Disregarded Entity Tax Status

For many companies in the U.S., the LLC has become an important component of their state and federal tax planning.

Once a state law corporation is converted to an LLC, losses that were locked in the corporation may be used to offset income if the LLC is granted a disregarded entity tax status for federal tax purposes. This status could also simplify tax filings for the company owner(s).

Companies that are thinking of converting their corporate subsidiaries into LLCs should determine if their EINs will be transferred to the LLC before they file a state conversion document.

If the predecessor corporation's EIN was used to obtain state registrations and licenses and file state and federal employment tax returns, the cost of obtaining a new EIN for the limited liability company may be substantial.

For instance, the payroll service used by the company would need to implement a new database for entities with a new EIN, which would be costly and time-consuming. Furthermore, for entities that are eligible for Medicaid and Medicare reimbursements, an interruption of their EINs would mean significant delays in receiving such reimbursements.

Avoiding Income Taxation at the Entity Level

Although a single member LLC with a disregarded entity tax status is treated as a corporation for excise tax and employment tax filing purposes, it avoids income taxation on the entity-level.

This means that single-member LLCs that are liable for excise tax or have employees must have its own EIN for filing Quarterly Federal Excise Tax Return, Forms 720, 940, and 941, and Employer's Quarterly Federal Tax Return.

State law corporations who use their EINs to file federal tax returns and payments usually prefer to retain the EIN when they convert to an LLC, whether the LLC is a partnership, an entity taxed as a corporation or a disregarded entity.

Selection of Federal Tax Classification

Due to the regulations contained in Regs. Secs. 301.7701-1 -3, eligible business entities are allowed to select their federal tax classification. Conversions from a state law corporation to an LLC means converting from an entity that can only be classified as a corporation to one that can choose its federal tax classification or default to the classifications described in Regs. Sec. 301.7701 -3 (b)(1).

Since the formation of an LLC occurs under state law, the IRS' decision on whether or not to reassign the corporation's historic EIN to a newly formed LLC is based on the same law.

Differences between Mergers and Conversions

The IRS delineates between a state law merger of a surviving LLC with a corporation and the conversion of a state law corporation to an LLC.

A merger is a joining of two distinct legal entities while a conversion involves changing a business' legal status.

Ordinarily, the IRS reassigns a corporation's EIN to the successor LLC if the conversion happens under state law; however, the requirements and steps are based on said local law. Tax advisers should not assume that state tax filings for a conversion of corporations that occurred in different states are the same.

For instance, the tax filings for a California conversion may be different from that of a Delaware conversion.

Also, there are states with no conversion statute — meaning that it isn't possible to convert corporations to LLC in such a state. In such a scenario, companies that want to re-organize into a single-member LLC (under the state's LLC statute) should

  • Form a single-member LLC under the LLC statute of the state.
  • Classify the LLC as a corporation effective from the formation date (initial election) by filing Form 8832…Entity Classification Election.
  • Merge the LLC with the corporation (with the LLC as the surviving entity) under Sec. 368(a)(1)(F).

Rev. Rul. 73 - 526 stipulates that a predecessor corporation's EIN will be reassigned to the successor corporation in a reorganization that involves only a change in form, identity or place of organization.

The LLC may file another Form 8832 to assume a disregarded entity tax status.

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