Converting from Sole Proprietorship to S-Corp Mid-Year

Two paths to S-Corp status:

Path 1: Form an LLC, elect S-Corp status.

1. Form a single-member LLC with the state (articles of organization, $50-$500 filing fee)
2. File Form 2553 (Election by a Small Business Corporation) with the IRS
3. Form 2553 deadline: within 75 days of the effective date of the S-Corp election, OR within 75 days of the beginning of the tax year (whichever applies)
4. The LLC is taxed as a sole prop until the election effective date, then as an S-Corp
5. Transfer assets from the sole prop to the LLC (tax-free under IRC 351 if the owner contributes assets in exchange for stock/membership interest and has 80%+ control)

Path 2: Form a corporation, elect S-Corp status.

1. Incorporate with the state (articles of incorporation, $50-$500 filing fee)
2. File Form 2553 within 75 days
3. Transfer assets under IRC 351 (same rules)
4. This path creates a true corporation that elects S status

Path 1 is more common for small businesses because the LLC provides liability protection and the S-Corp election is layered on top. State-level differences (franchise taxes, annual report fees) may favor one path.

Mid-year conversion timeline: If converting on July 1:

• January 1 to June 30: reported on Schedule C (sole prop)
• July 1 to December 31: reported on Form 1120-S (S-Corp) and K-1 to owner
• Two separate federal returns for one year of business activity
• The owner’s Form 1040 includes BOTH the Schedule C income (Jan-Jun) and the K-1 income (Jul-Dec)

Form 2553 timing for mid-year:

• If the desired effective date is July 1: Form 2553 must be filed by September 13 (75 days after July 1)
• Late elections: the IRS will sometimes grant late relief under Rev. Proc. 2013-30 if reasonable cause is shown and the business operated as an S-Corp in practice
• For a January 1 effective date: file by March 15 of the year (75 days)

What transfers to the S-Corp:

• Business bank accounts (new account in entity name)
• Equipment and vehicles (retitle or bill of sale)
• Contracts (assignment clauses)
• Business licenses and permits (re-apply in entity name)
• Website and domain names
• Inventory
• The transfer is tax-free under IRC 351 as long as the owner receives only stock/membership interest in exchange

What does NOT transfer automatically:

• EIN (the S-Corp needs its own EIN)
• Payroll accounts (new payroll must be set up for the S-Corp)
• State registrations (new registration in entity name)
• Insurance policies (update named insured)