Moving a 15-year-old S corporation into an LLC — and into the trust structure

Deep research pass, 2026-07-27. Companion to ASSET-PROTECTION-STRUCTURE.md.

Not legal or tax advice. This is the map, not the drive. The corporate-level gain calculation below decides whether this is a $2,000 project or a $200,000 project, and only a CPA looking at the actual balance sheet can tell you which. Model the tax cost before you file anything.

1. Why the S corporation has to change at all

The trust is the reason. An irrevocable non-grantor trust is not an eligible S corporation shareholder (IRC § 1361(b)(1)(B)). Transfer the stock to it and the S election terminates on the first day the ineligible shareholder holds the shares — retroactively, silently, and you find out at exam.

The two ways to keep S status with a trust both defeat the purpose:

There is also a grantor-trust grace period: a grantor trust is an eligible shareholder during the owner's life and for 2 years after the owner's death (§ 1361(c)(2)(A)(ii)). That is a runway for an estate, not a plan.

So: convert to an LLC taxed as a partnership or disregarded entity, and the eligible-shareholder problem disappears permanently. That is also the direct answer to "why not a C corp" — a C corp is allowed to be trust-owned, but you pay entity tax, then dividend tax, and you get no § 1014 step-up on the stock anyway if it sits outside the estate.

2. The hard truth first: there is no free exit from corporate solution

An S corporation that becomes an LLC taxed as a partnership or disregarded entity is a deemed liquidation. There is no tax-free path. Specifically:

• Corporate level — IRC § 336. The corporation is treated as having sold all its assets at fair market value. Gain is computed asset by asset, and the character follows the asset: § 1245 depreciation recapture on equipment is ordinary, § 1250 on buildings, capital on goodwill and land.
• Flow-through. Because it is an S corporation, that gain passes out on the final Schedule K-1 and is taxed to the shareholders, increasing their stock basis by the same amount.
• Shareholder level — IRC § 331. The deemed distribution in liquidation is treated as full payment in exchange for the stock; gain or loss is the difference between the FMV received and the (now increased) stock basis.
• Net effect. Usually one economic layer of tax, but with an ordinary-income component you cannot avoid, payable in the year of conversion, in cash, on a transaction that produced no cash.
• The offset. After the deemed liquidation the assets land in the LLC with a fresh FMV basis — new depreciable life on the equipment and building. Over time that recovers part of the cost. Model the present value; do not assume.

The one piece of good news for a 15-year-old S corp

Built-in gains tax under § 1374 is almost certainly a non-issue. § 1374 applies only to a corporation that was formerly a C corporation, and only to gains recognized within the 5-year recognition period after the S election. At 15 years, that window is long closed — whether the company elected S at formation or converted later. Confirm the election date on the original Form 2553 acceptance letter, then stop worrying about § 1374.

Do still check for accumulated earnings and profits from any pre-S C years, and the AAA balance, because those affect the ordering of distributions on the way out.

3. The four routes, compared

Route B deserves a close look — and a warning

Route B is the well-documented technique for keeping the historic EIN: form a wholly owned LLC, file Form 8832 classifying it as a corporation effective at formation, then merge the corporation into the LLC with the LLC surviving. That qualifies as a mere change in identity or form under § 368(a)(1)(F), and Rev. Rul. 73-526 holds the predecessor's EIN is reassigned to the successor in an F reorganization.

The warning: at the end of Route B you have an LLC that is still taxed as an S corporation. You have changed the legal wrapper, not the tax regime — so the trust still cannot own it. To finish the job you must later revoke the corporate classification, which is itself the deemed liquidation you were trying to avoid, and Reg. § 301.7701-3(c)(1)(iv) generally bars changing an entity's classification again for 60 months.

Route B is therefore the right answer only if you want to stay an S corp (for example, keeping the reasonable-compensation/distribution split and holding the stock personally or in a QSST/ESBT) and want LLC governance flexibility. It is not a way to slip an S corp into a non-grantor trust untaxed.

(Related but distinct: Rev. Rul. 2008-18 covers the common F reorg where the S corp becomes a QSub of a new holding corporation. There, the historic entity keeps its EIN and the new holding company must obtain a new EIN. The S election carries over to the holding company. Useful if you want a corporate holdco; not what this structure calls for.)

4. "Should we get rid of the old EIN and get a new one?"

Direct answer: it is mostly not your choice, and the EIN is not the thing worth optimizing.

When the IRS requires a new EIN

A corporation must obtain a new EIN when it changes to a partnership or a sole proprietorship. Route A — converting the S corp into an LLC taxed as a partnership or disregarded entity — is exactly that change. New EIN required. An F reorganization (Route B) is the documented exception where the historic EIN survives.

What actually breaks when the EIN changes — the real checklist

The EIN itself is a nine-digit number. These are the things attached to it that cost real money if you let them lapse:

Verdict: do not chase EIN retention for its own sake. Choose the route on tax cost and legal cleanliness, then manage the identity-transition checklist above properly. A new EIN with a clean transition is far better than a preserved EIN attached to a structure that does not work.

5. Recommended sequence (Route A — the usual answer)

The ordering matters enormously. Convert first, gift second. Gifting S stock to a non-grantor trust before conversion terminates the election immediately.

Phase 0 — Model and decide (before anything is filed)

1. Balance sheet at FMV: appraise real estate, equipment, vehicles, goodwill.
2. CPA computes the deemed-liquidation gain, split ordinary (§ 1245/1250 recapture) vs. capital, plus state tax.
3. Confirm the original S election date; confirm no § 1374 exposure remains.
4. Confirm AAA and any accumulated E&P.
5. Confirm the after-conversion basis step-up and new depreciation schedules.
6. Decision gate: if the tax bill exceeds what the structure saves over a realistic horizon, take Route D instead and build beside the S corp.

Phase 1 — Extract the risky assets first (often the smarter first move)

Real estate and heavy equipment should not be inside the operating entity anyway. Note that distributing appreciated property out of an S corp is itself a deemed sale under § 311(b) — so this is part of the same tax model, not a way around it.

Phase 2 — Build the receiving structure

1. Trust is formed, funded nominally, has its EIN (Form SS-4), has both trustees appointed and the protector named, and has a bank account.
2. Holding LLC formed; trust is the member; own EIN; operating agreement signed; bank account opened.
3. Asset LLC(s) formed under the holding LLC, with EINs and accounts.

Phase 3 — Convert the S corporation

1. Board/shareholder approval of the plan of conversion.
2. Wisconsin Articles of Conversion — DFI Form Corp1000, $150 filing fee ($100 more for expedited), under Wis. Stat. §§ 183.1041–183.1045 (and § 180.1161(5) on the corporate side). Submit to DFI, Box 93348, Milwaukee WI 53293-0348.
3. Adopt the LLC operating agreement the same day.
4. Form 966 — corporate dissolution or liquidation, due within 30 days of adopting the plan.
5. New EIN for the LLC (Form SS-4) — unless you took Route B.
6. Final Form 1120-S, box checked "final return," with final K-1s reporting the deemed liquidation gain.
7. Form 8822-B for responsible-party changes.
8. State: final WI corporate franchise return; new LLC registration; sales-tax seller's permit; DWD UI successor transfer; new withholding account.
9. Retitle everything: deeds (with the Wisconsin electronic Real Estate Transfer Return — check the ch. 77 transfer-fee exemptions with counsel), vehicle titles, bank accounts, insurance, UCC filings, contracts, licenses.

Phase 4 — Gift the LLC into the structure

1. Qualified appraisal of the LLC membership interest, with any discount for lack of control and lack of marketability supported in the report (mind § 2704).
2. Assignment of membership interests from the individual owner(s) to the Holding LLC (owned by the trust), or directly to the trust.
3. Amend the LLC operating agreement and the member register.
4. Form 709 for the year of the gift, with adequate disclosure under Reg. § 301.6501(c)-1(f) so the 3-year assessment period on the valuation starts running. Allocate GST exemption if grandchildren are beneficiaries.
5. Update the trust's Schedule A and issue a Letter of Conveyance.
6. Watch § 704(c) — built-in gain on contributed property must be allocated back to the contributing member — and the disguised sale rules if any money moves the other way.

Phase 5 — Wire up the operating relationships

1. Written lease from Asset LLC to Operating LLC at documented FMV rent.
2. Reasonable compensation for anyone performing services, on a W-2 or as guaranteed payments — this is not optional.
3. Management agreement between Holding LLC and Operating LLC if there are real shared services, priced at arm's length.
4. Decide and document the § 1.469-4 grouping election posture, disclosed under Rev. Proc. 2010-13 on a timely filed original return.
5. Set up the 1099-MISC (Box 1, rents) reporting where required.

6. What the finished structure looks like

                 SETTLOR
                    │ gift of LLC units (Form 709 + appraisal)
                    ▼
   IRREVOCABLE NON-GRANTOR DISCRETIONARY SPENDTHRIFT TRUST
       Trustee A (independent) · Trustee B (family) · Protector
       EIN · Form 1041
                    │ 100% member
                    ▼
              HOLDING LLC  (Form 1065 → K-1 to trust)
                    │
        ┌───────────┴────────────┐
        ▼                        ▼
  OPERATING LLC              ASSET LLC
  (the former S corp)        (building, equipment)
  Form 1065 · payroll        Form 1065 / disregarded
        ▲                        │
        └──── FMV lease ─────────┘
              rent paid monthly

Money path: customers → Operating LLC → (wages, rent, expenses) → net profit K-1 → Holding LLC → K-1 → Trust → distribute DNI to beneficiaries (their rates) or accumulate (37% over $16,000 in 2026, plus 3.8% NIIT).

7. Traps specific to this migration

1. Gifting the stock before converting — instant S termination. Sequence matters more than anything else on this page.
2. Assuming an LLC conversion is a "mere name change." It is a liquidation.
3. Selling depreciable assets to the trust instead of gifting them — § 1239 turns the entire gain into ordinary income on a sale to a related party, including a trust in which the seller or spouse is a beneficiary.
4. § 267(a)(2) — accrual-basis payor, cash-basis related payee: the deduction waits for the inclusion. Keep both sides cash-basis, and actually pay the rent.
5. Revoking S and thinking you can undo it — § 1362(g) bars re-election for 5 tax years without IRS consent.
6. Form 8832 60-month lock — Reg. § 301.7701-3(c)(1)(iv). Do not elect classification casually.
7. Forgetting Form 966, the final-return checkbox, or the final K-1s.
8. Letting the UI experience rate reset, or restarting FICA wage bases by ignoring Rev. Proc. 2004-53.
9. Moving assets while a claim is pending — Wisconsin's Uniform Voidable Transactions Law (ch. 242) with a 4-year reach-back (§ 893.425). Document solvency at the time of transfer.
10. Single-member LLC casualness. If the trust is the only member of the holding LLC, the entity is disregarded for tax — but the legal separateness still has to be maintained, or you lose the liability wall you paid for.

8. Government forms and filings — one list

IRS — SS-4 (EIN) · 8832 (entity classification) · 2553 (S election — history only) · 1120-S final · 966 (dissolution/liquidation) · 8822-B (responsible party) · 1065 + K-1 · 1041 + K-1 · 1041-ES · 56 (fiduciary notice) · 709 (gift/GST) · Revoking a Subchapter S election.

Wisconsin — DFI Corporations · Articles of Conversion, Form Corp1000 · Wis. Stat. § 183.1041 · ch. 183 · Department of Revenue (franchise/withholding/seller's permit) · Department of Workforce Development (UI successor transfer).

FinCEN — BOI reporting. Domestic entities are currently exempt under the March 26, 2025 interim final rule; re-check before each new formation.

Sources

IRC §§ 311, 331, 336, 368(a)(1)(F), 704(c), 1239, 1245, 1250, 1361, 1362, 1374; Treas. Reg. §§ 301.7701-3, 301.6501(c)-1(f), 1.1362-6, 1.469-4. Rev. Rul. 73-526 · Rev. Rul. 2008-18 · Rev. Rul. 64-250 · Rev. Proc. 2004-53 · Rev. Proc. 2010-13 · Rev. Proc. 2025-32. Conversion of corporation to LLC raises EIN retention questions · F reorg of an S corp may require a new EIN · Preserving an entity's existing EIN in cross-species mergers and conversions · F reorganization under Rev. Rul. 2008-18: timing of QSub election is key · Terminating an S election by revocation · Trusts as S corporation shareholders.