From S-Corp to LLC
Hi Linda,
Thanks a lot for your help.
Really you help a lot of deserving people. I appreciate it. Two years ago I read your article about "corp to corp , 1099 or W2." and I decided to form S-corp which I did in Feb 2007. Last year I worked as W2 so I did not have to worry too much about s-corp besides I had an accountant who took care of my taxes. This year I have a contract as corp to corp. I am paying myself reasonable salary and I was paying payroll taxes through EFTPS and NYSPrompt electronically every month and filing quarterly taxes on time, by the way I live in New York State. This time I made two mistake first I did not have an accountant and second I was withdrawing money for my personal expenses so balance sheet does not tally with expenses. I am making only 110000 a year. My question is what worst can happen if I am audited. Now I realize that because of too much work involved in s-corp I should have gone for LLC. Still I am thinking to form LLC. Please help me is it OK to dissolve S-corp and form LLC, have both or stick to S-corp. Your help would be greatly appreciated.
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FIxing Mistakes
First, thanks the kind words. :) Second, I'm sorry you had problems. :(
The first thing you need to do is fix the personal expenses. Those could be considered distributions and that should fix your balance sheet. And stop doing that. :) Your S-Corp is a separate legal entity & should be treated at "arms-length". You wouldn't go into your neighborhood grocery store & pull money out of their cash drawer to pay your personal expenses. Treat your own company the same way. If you need more cash from the company either pay yourself more salary or take a distribution.
On the audit question, it depends on how the auditor sees it. They could reclassify the personal expenses as distributions, or if you're unlucky, then it could be reclassified as payroll. In which case your S-Corp would have to pay the tax, penalty & interest on the unpaid employment taxes & withholdings. You can expect that NY will be close on the heels of the IRS with its own audit.
You cannot convert an S-Corp to an LLC. You must dissolve the S corp (which could have tax consequences) and then start the LLC afresh. I'm not sure making the change would be that big of an improvement as you would still need to keep the LLC separate finances from your personal ones.
To dissolve the NY Corporation, see this NY Division of Corporations FAQ. You need to file a Certificate of Dissolution and obtain the consent of the Tax Commissioner by call an automated phone line: 1-800-327-9688. The FAQ lists the information needed to obtain consent.
I think you should just change your view of the S Corp and work within its limitations rather than reforming as an LLC. Each entity type has its advantages & disadvantages.
There's no option without consequences. :)
Hope this helps.
L:)