How To Convert An LLC To An S-Corp: Free Guide 2023
The business forms of LLC, or Limited Liability Corporation, and S Corp, or S Corporation, are two of the most used in the United States. A statutory conversion is the process of changing from one entity to another. How is the LLC taxed? Each has its own benefits in LLC’s tax status, employment, and profit sharing. Should you set up an LLC but find the need to change because of tax implications, you can by following a few simple steps. Before making this change, be sure you understand your tax liability. In this article, we walk you through the reasons for a statutory merger and how to change the designator for your business entity.
LLC Vs S-Corp
What Is an LLC?
LLC stands for Limited Liability Corporation; it may also be known as a sole proprietorship. Forming an LLC can provide legal protections for the owner from; lawsuits, and liability protection, and makes the business a legal entity with corporate bylaws.
Because the business is its own entity under the LLC designation, the LLC’s assets, bank accounts, and other possessions like home or car, are not considered company assets. However, the owner still pays self employment taxes.
An LLC will also have an independent and exclusive business name, which means that once incorporated no other business within that state can use the same name.
A limited liability company also has tax advantages. LLC is taxed as a pass-through entity, making it easy to pay self employment tax. For example, a single-member LLC can be taxed as a sole proprietorship. The LLC owner would report profits and losses within personal tax returns.
What Is an S Corporation?
S corp status stands for Small Business Corporation. S corporation status typically identifies businesses with up to 100 shareholders. The corporate taxes, payroll taxes, and credits are passed through shareholders of the S corporations. In an S Corporation, income is taxed at the shareholder level according to the interest the shareholder has invested in the company. This makes it easier to fill out an LLC owner’s personal tax return.
For the S Corp status, all shareholders must be individuals, with the exception of some non-profits or trusts, must be U.S. citizens or residents, and it must release only one class of stock.
S Corporations are subject to IRS compliance and have more rules and regulations to follow than LLCs, and in some states corporation tax status is the same at the state as the federal level.
As with an LLC certificate, this status protects the owner’s assets – accounts at financial institutions, home, car, etc. – from business debts.
Reason for Choosing S Corporation
The most common reason to choose S Corporation designation is for income tax purposes or federal tax purposes. With an S Corp election, your business entity can avoid having company profits taxed at the shareholder and corporate levels. As an S Corporation, you can also be company employee rather than the owner, which has additional tax savings. As an LLC, the owner also pays self employment tax; this includes a social security tax and a medicare tax. Self employment taxes are one of the reasons many choose to change a business entity from an LLC to an S Corp election.
How To Convert LLC To S-Corp
An LLC can be converted to an S-Corp in a few simple steps. In many cases, the business structure is first set up as a single member LLC or multi member LLC because this is one of the simplest formations. However, as the business expands, perhaps moves into new regions, and as profits grow there will be benefits to changing from the LLC management structure to an S Corp tax structure. There can be benefits to retirement accounts and stocks. The corp status holds tax benefits and a reduction in tax burden. To make the corp conversion, follow these steps:
Confirm S-Corp Qualifications
Businesses must meet certain qualifications to become an S Corp. To see if your LLC qualifies it must: be a United States business, it can have no more than 100 members or shareholders and have only a single stock classification. Shareholders can be individuals or certain types of trusts or estates, but they cannot be partnerships, other corporations, or non-citizens.
Check IRS Form 2553 Due Dates
Next, you’ll check the Internal Revenue Service website for form 2553. This form must be filed by March 15 of the tax year you want the form to take effect. The 2553 form is a tax election form which formalizes the S Corp tax status. Make sure there is time between the LLC members’ votes to have this paperwork filed correctly; all corporation stockholders vote for this change.
Complete & File IRS Form 2553
Next, you’ll complete the form. A newly formed corporation has 75 days from its formation to filing this paperwork. For those changing from LLC to S Corp, the form can be filled out at any time during the year up until March 15 of the year when the taxation is to go into effect.
LLC to S-Corp Tax Consequences
Both LLC and S Corp statuses make financial sense. They offer the owner the ability to use pass through entities for flexibility in how the s corp or LLC is taxed. However, as an LLC the owner must pay self employment taxes; an S Corp does not. Business taxes can run through the owner’s personal tax return. Pass through taxation means that those within S Corp vs C Corporation status or limited liability company have a tax classification according to their personal income from their share of the business. Because of this more company profits pass to the shareholders. The LLC owner may pay federal taxes from the same return. In most states, this means personal income taxes are at the minimum 37% rate. Both also provide benefits in payroll taxes.
An S-Corp designation will protect the personal assets of the owner, board of directors, and shareholders, and offer pass-through taxes. Also, an S-corp will have procedures in place for the transfer of the business. S-corps can also issue stock, and have up to 100 shareholders.
The Top 2 Limited Liability Company Services
|Award||Most Economical||Best Overall|
|Detail||Read Review||Read Review|
Northwest Registered Agent
Northwest’s suite of tools offers business services at a reasonable price. The main difference between Northwest and similar entities is that Northwest only offers one paid plan for services. The initial cost is $39 to file the LLC paperwork; all other charges are due as per state law. There is a separate option, called Pay In Full. With this option, which costs $225, Northwest will file the LLC, and provide agent services for one year, however, all other charges from state fees, etc., will still apply.
Northwest also has a strict no-data-selling policy and will provide pricing changes in advance. Northwest also offers the ability to pay by the month, with an auto-renew option.
- For $39, Northwest’s services will help you form your LLC within a month, including annual compliance with your state’s LLC act
- Northwest also includes stand alone services including compliance filing, EIN filing and S Corp business filings
- Affordable legal services
Zenbusiness is a one stop shop for small business preparation. Through Zenbusiness you can search for available business names, create articles of incorporation, find out the needed documentation for your state and federal filings and registrations, obtain an EIN, and build the business’ web presence through domain names, email, and domain privacy protection.
Zenbusiness offers three tiers of members.
- For $0(Starter Plan), you can form your business within 3 to 4 weeks, file LLC paperwork, get an annual compliance service, search for business names, have phone/email support, and online document access. The Starter Plan does not automatically renew each year.
- For $199 (Pro Plan), you get all of the Starter Plan benefits, plus extras including a business operations agreement, expedited filing services, a virtual business guide, and Google Ads credit. The Pro Plan automatically renews each year.
- For $299 per year (Premium Plan), you get all of the Starter Plan and Pro plan benefits plus extras including a business website, a business domain name, and a business email address. The Premium Plan automatically renews each year.
- Affordable legal services
Read more: Best LLC Services 2023
Difference Between S-Corp & C-Corp?
The primary difference between an S Corp and a C Corp is the way the business is taxed. As a C Corporation, you report business income. How is the corporation taxed? As a single member LLC, income has double taxation – at the business level and then once more when profits or earnings are passed to owners as stock dividends. As an S Corp, you can avoid double taxation because income is only taxed at the business level.
You do not have to change the business name or get a new Employer Identification Number when changing the designation for your small business because it is not creating a new corporation. An LLC can be taxed as an S Corp without changing the official status of the business. This is typically done when small business profits carried over from year to year meet a certain threshold. However, once profits reach that threshold, it can be of benefit to change to a C-Corp rather than an S Corp. These changes must be filed with your Secretary of State.
There are several benefits to changing a business entity from LLC to a corporation, with many being tax benefits. As an S Corp, additional company profits will not be taxed at the individual and company level, which can result in huge savings. The S Corporation designation offers more growth opportunities while the LLC designation offers more flexibility overall.
Frequently Asked Questions (FAQs)
Yes, but the type of physical address can vary. All business entities need a business address as well as an agent address. The business address can be virtual such as a post office box. The agent address must be a physical address which can accept mail delivery during business hours. This can be the physical address of the business owner, the physical address of the business.
Once a certain tax threshold is met, the S corporation designation will help to allay some of expansion costs. If the business has the chance to become an international entity, an S-corp will be necessary as LLC designations are only for the U.S.; the same protections do not apply in other countries. To save money, some LLC owners will take a reasonable salary rather than profits, at least as the business is in the start up phase.
Yes, and no. For LLC, there is no member or board number that must be met. The business owners to form an LLC can be only one person, or can span as many members as is needed. For S-corp, there is a 100 member limit. An S corp can have no more than 100 shareholders, but must have a board of directors and also corporate leadership positions. Shareholders pay tax.
Yes, but there will be hurdles. A business ownership structure can be changed from an LLC to an S-corp with certain paperwork. The switch is not difficult, however, it can lead to other issues if there are not specific rules in place beforehand. LLCs are more flexible than S-corps, and leadership may not like the changes, if not previously specified, that an S-corp filing requires. This is why it may be beneficial to structure your LLC as an S-corp from the beginning. This way all parties know the business structure prior to launch, and transfer to the S-corp designation at a time that makes sense for the company.
Profits. LLC members can receive a profit distribution. This is done salary and other business expenses are paid. These distributions are taxed at the personal level.
ABOUT THE AUTHOR
ABOUT THE REVIEWER
+ 4 sources
Bizreport Advisor adheres to strict editorial integrity standards avoids using tertiary references. We have strict sourcing guidelines and rely on peer-reviewed studies, academic research. To ensure the accuracy of articles in Bizreport, you can read more about the editorial process here.
- About Form 2553, Election by a Small Business Corporation | Internal Revenue Service. www.irs.gov. Accessed January 29, 2023. https://www.irs.gov/forms-pubs/about-form-2553
- Internal Revenue Service. Internal Revenue Service | An official website of the United States government. Irs.gov. Published 2019. Accessed January 29, 2023. https://www.irs.gov/
- Start & Grow Your Business With The ZenBusiness Platform. ZenBusiness Inc. Accessed January 29, 2023. http://www.zenbusiness.com
- Registered Agent | Corporate Guides | NW Registered Agent. Northwest Registered Agent. Accessed January 29, 2023. http://www.northwestregisteredagent.com