How to Convert an LLC to S Corporation? (2023 Upd. Guide)
Converting your LLC (limited liability company) to an S Corporation can save you self-employment taxes, but it's not a decision to be made lightly. You need to take a few things into account before making the switch, such as whether your business will continue to qualify for the S Corporation status and whether you're prepared to deal with the added paperwork.
If you're looking to convert your LLC to an S Corporation business entity, we've got you covered. In this article, we'll walk you through the entire process step-by-step. We'll explain the benefits of converting your business and how to make the transition as smooth as possible.
Let's get started!
LLC to S Corp
Step 1: Check if your Business Qualifies
The first step is to ensure that your business qualifies for S Corp status. In order to be eligible, your business must meet the following requirements:
- It must be a domestic corporation - In order to qualify, your business must be organized in the United States. This is important because S Corporation status is only available to businesses organized domestically. Additionally, your business must have a valid business purpose.
- It can't be an ineligible corporation - There are a few types of businesses that are not eligible for S Corporation status. These include financial institutions, insurance companies, and domestic and international sales corporations.
- It must have only one class of stock - In order to qualify, your business can only have one class of stock. This means that all shareholders must have the same rights and privileges when it comes to voting, dividends, and distributions.
- It can't have more than 100 shareholders - In order to qualify, your business can't have more than 100 shareholders. Additionally, all shareholders must be individuals, certain trusts, or estates. Your business can't have any corporate shareholders.
- Its shareholders must be individuals, estates, or certain trusts - As we mentioned before, all shareholders must be individuals, certain trusts, or estates. This means that your business can't have any corporate shareholders.
If your business meets these requirements, you can move on to the next step.
Step 2: File Form 2553 with the IRS
The next step is to file Form 2553 with the IRS (Internal Revenue Service). This form is used to elect S Corporation status for your LLC.
You can find Form 2553 on the IRS website. You should fill it all up and send it to the IRS. The mailing address is on the form itself.
When you're filling out Form 2553, there are a few things you need to keep in mind:
All shareholders must sign - In order for your LLC to be converted to an S Corporation, all shareholders must sign Form 2553. This includes anyone who owns shares in the company, even if they're not actively involved in the business.
You need to file within 75 days of formation - In order to qualify for S Corporation status, you must file Form 2553 within 75 days of forming your LLC. This means that you can't wait too long to make the decision to convert your business.
Once you've filed Form 2553, you'll need to wait for the IRS to approve it. They will send you a letter confirming that your LLC has been converted to an S Corporation.
Step 3: Amend your Articles of Incorporation
The next step is to amend your Articles of Incorporation. This document needs to be updated to reflect the changes that have been made to your business, such as the conversion from an LLC to an S Corporation.
You can find a template for amending your Articles of Incorporation on the website of the Secretary of State. Once you've filled it out, you'll need to submit it to the Secretary of State's office.
Step 4: Notify your Bank and Creditors
The next step is to notify your bank and creditors that your business has been converted to an S Corporation. This is important because it will affect how your business is taxed.
You should send a letter to your bank and creditors informing them of the change. You can find templates for these letters on the IRS website.
Step 5: File 8832
The final step is to file Form 8832 with the IRS. This form is used to elect your business's tax classification.
You can find Form 8832 on the IRS website. Once you've filled it out, you'll need to send it to the IRS. The mailing address is on the form itself.
Why Do People Switch From LLC to S Corp?
There are a few reasons why people choose to switch from LLC to S Corp. The most common reason is to save on self-employment taxes. A self-employment tax is a tax you have to pay if you're self-employed.
As an S Corp, you can elect to have your business income taxed as personal income, which means you'll only be subject to the lower personal tax rates.
Another reason to switch to S Corp status is that it can make it easier to attract investors. Many investors are only willing to invest in businesses that have S Corp status because it offers them some additional tax benefits.
Finally, some businesses choose to switch because they feel it makes them look more professional. Having S Corp status can boost your business credibility, which can be helpful when you're trying to win over customers or clients.
Similar Article: LLC Electing To Be Taxed As an S Corp
Which Is Better for Me, S Corp or LLC?
The answer to LLC vs S corp debate depends on your individual circumstances. There are pros and cons to LLCs and S Corps, so you'll need to weigh the benefits and drawbacks of each before making a decision.
If you're self-employed, switching to an S Corp can save you money on self-employment taxes. However, it's important to note that you'll be subject to higher corporate tax rates if you elect S Corp status.
If you're looking to attract investors, switching to an S Corp can make it easier to do so. However, you'll need to be prepared to deal with the added paperwork and compliance requirements of being an S Corp.
Finally, if you're looking to boost your business credibility, switching to an S Corporation can help with that. However, you'll need to be prepared to pay the higher corporate tax rates.
Only you can decide which business structure is right for you. Weigh the pros and cons of each option carefully before making a decision.
When Should You Convert From LLC to S Corporation?
There is no perfect time to convert from LLC to an S corporation. It all depends on your individual circumstances and what makes sense for your business. You may want to consider converting if you want to reduce your tax liability, if you're looking to attract investors, or if you're looking to give your business a boost in credibility.
Weigh the pros and cons of each option carefully before making a decision.
See also: How to find a registered agent for a corporation
FAQs
Who Pays More Taxes LLC or S Corp?
LLCs taxed as sole proprietorships pay more taxes than S corps because the profits and losses from an LLC taxed as a sole proprietorship are included on the owner's individual tax return. This is called "pass-through taxation." On the other hand, S corps are pass-through entities too, but their profits and losses are only passed through to their shareholders' individual tax returns if they're distributed.
Are You Considered Self-Employed if You Own an S Corp?
Yes, you are considered self-employed if you own an S Corp. However, if you are involved in managing your S Corp, you would be considered an employee and not self-employed.
Can an LLC Choose to Be Taxed as an S Corp?
The IRS allows limited liability companies to elect to be taxed as S corporations for federal tax purposes. This means that the LLC will be treated as a corporation for federal income tax, but it will still be treated as a partnership for state and local tax purposes. This can be beneficial because it allows the LLC to take advantage of the lower corporate tax rates.
Converting an LLC to an S Corporation: Conclusion
Converting your limited liability company to an S Corporation isn't hard if you follow the steps listed above. But we also highly recommend you seek advice and guidance to help you amend the operating agreement.
We hope this article has helped you understand the process and what you need to do to make it happen. Thank you so much for reading!
