Can I switch Later?
There are two answers.
- If you are an Idaho LLC being taxed as a Sole Proprietor, or a Partnership, then yes you can opt to elect an Idaho S-Corporation or C-Corporation later down the road as you grow.
- However, if your LLC has already selected to be taxed as a Corporation, then a switch to a Sole Proprietor, or a Partnership would trigger the liquidation of your company’s stock. This could also be a red flag to the IRS who may believe that you are making the conversion for tax related reasons.
An LLC that has elected to be taxed as a corporation needs a limited liability company agreement designed for its situation. If the company has made an S-Corporation election, it is very important that the LLC agreement have protective language in the document providing, among other things, that investors may not join who would be an issue with the S-election because of their status (e.g., an entity or a foreign citizen). Disclosure and communication to members is critical with this kind of entity, because the distinctions are not widely understood, and investors/members may have incorrect assumptions.
The take away for a startup company is that if you are an LLC and you are being advised to make an S election, or even a C corp election, understand that you will become kind of a hybrid entity that isn’t always well understood. Also, once a corporate election is made, that is what you are in the eyes of the IRS. You can’t switch back to being taxed as a partnership without consequences – you will be treated as liquidating the corporation for tax purposes and may have tax liability as a result.