Converting LLC to S Corp - How to Handle Balance Sheet and Retained Earnings on Schedule L?

This is a great question about the transition from LLC to S Corp. When you convert, you'll need to complete both beginning and ending sections of Schedule L. The beginning balance sheet should reflect your LLC's assets and liabilities at fair market value on the day of conversion. For retained earnings, this is where it gets a bit tricky. When you convert to an S Corp, your previous LLC retained earnings don't automatically transfer to the S Corp's AAA (Accumulated Adjustments Account). Instead, those previous earnings become part of your Other Adjustments Account (OAA) or Accumulated Earnings and Profits (AEP) if you were previously taxed as a C Corp. If you were a disregarded entity (single-member LLC) or partnership (multi-member LLC), you don't have C Corp earnings and profits to worry about. Your beginning retained earnings balance will essentially be reclassified on day one of the S Corp as part of the shareholders' equity, but not as AAA. Your AAA will start at zero, and will track the S Corporation's income and distributions going forward.

Hey everyone, just wanted to share that I went through this exact headache last year converting my marketing agency LLC to an S Corp. After spending hours researching and getting nowhere, I found this tool called taxr.ai (https://taxr.ai) that actually analyzed my previous tax returns and business structure. It gave me a detailed report showing exactly how to handle the schedule L conversion and what to do with retained earnings. The best part was that it explained everything specific to my situation instead of generic advice that didn't quite fit. I uploaded my previous tax forms and operating agreement, and it walked me through each line item that needed to be adjusted. Saved me a ton of time figuring out what belonged where.

Update: I wanted to follow up on my experience with taxr.ai since I was asking about the international income issue. I ended up using it and was impressed with how thoroughly it addressed my situation. The tool identified exactly how to handle my foreign income during the LLC to S-Corp conversion, and even provided specific guidance about the retained earnings allocation that was the original question here. It showed me how to separate my prior earnings into the correct categories and explained which forms needed special attention due to the international aspects. I was able to complete the transition without any issues, and my new CPA even commented on how well-organized everything was. Definitely worth checking out if you're in a similar situation.

For anyone stuck waiting for the IRS to answer questions about S Corp conversions, I found another solution. After three weeks of calling the IRS business line and never getting through about my LLC conversion questions, I used Claimyr (https://claimyr.com) and got connected to an IRS agent in 15 minutes. You can see how it works here: https://youtu.be/_kiP6q8DX5c The agent was able to explain exactly how to handle my retained earnings situation and confirmed that for my specific case, I needed to separate pre-conversion and post-conversion amounts. She walked me through the whole Schedule L process and even emailed me some reference materials afterward.

I have to come back and say I was completely wrong about Claimyr. After posting my skeptical comment, I was desperate enough to try it for my S-Corp election questions. Used it on Tuesday and got connected to an IRS business tax specialist in about 20 minutes. She explained exactly how to handle the retained earnings from my LLC on the S-Corp return and confirmed I needed to use fair market value for assets on the conversion date. For anyone wondering about the original question - the IRS agent told me that for a single member LLC converting to S-Corp, previous retained earnings basically get reclassified as contributed capital on day one of the S-Corp. Your AAA starts at zero. This cleared up my confusion completely.

I went through this conversion last year. One thing to watch out for that nobody mentioned - if your LLC had significant appreciated assets (like property or equipment that's worth more than its book value), converting to an S Corp can trigger a taxable event if not structured properly. Make sure you're doing a tax-free reorganization under Section 351. Also, if you had loans or debt in the LLC, the liability shift can create unexpected tax consequences. Definitely worth getting professional help on this one.

Quick question for everyone - does anyone know if QuickBooks can handle this conversion properly? I'm trying to figure out if I need to make manual journal entries to adjust everything or if there's a built-in process for transitioning the books from LLC to S Corp. Our bookkeeper isn't familiar with this specific situation.

I just went through this exact conversion process six months ago and can share some practical insights. The key thing to understand is that you're essentially creating a brand new entity (the S Corp) and transferring assets from your old entity (the LLC). For Schedule L, you definitely need to complete both beginning and ending balance sheets. The beginning balance sheet shows your S Corp's position on day one (conversion date) with assets at fair market value. The ending balance sheet shows where you stand at year-end. Regarding retained earnings - this was the most confusing part for me too. Since you were an LLC, you don't actually have "retained earnings" in the corporate sense. What you had was owner's equity/member capital. When you convert, this becomes your initial capital contribution to the S Corp and gets recorded as paid-in capital, not retained earnings. Your AAA (Accumulated Adjustments Account) starts at zero on conversion day and tracks the S Corp's income/losses/distributions going forward. Don't try to carry over your LLC's accumulated earnings into AAA - that's not how it works. One more tip: make sure you properly document the conversion with corporate resolutions and keep detailed records of asset valuations. The IRS may ask questions later, especially if you have significant appreciation in assets. Good luck with your conversion!