How To Convert LLC To S Corp? Free Guide 2024

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. 

How To Change 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.^[1] 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 that formalizes the S Corp tax status. Ensure 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 when the taxation is to go into effect. 

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 a 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 corporation 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 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 a 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. 

Difference Between S Corp & C Corp?

The primary difference between an S Corp and a C Corp is how 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. 

LLC To S Corporation 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. 

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Final Thoughts

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 an LLC to a corporation, with many 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)