How to Convert an LLC to S Corporation? (2024 Upd. Guide)

Jon Morgan
Published by Jon Morgan | Co-Founder & Chief Editor
Last updated: March 12, 2024
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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.

To assist you in changing an LLC to an S Corp, we have assembled a team of LLC experts with over two decades of experience dealing with various businesses.

Quick Summary

  • To convert an LLC to an S Corporation, ensure your business qualifies under IRS criteria, including being a domestic entity with no more than 100 shareholders, and file Form 2553 with the IRS.
  • Amending your LLC's Articles of Incorporation and notifying your bank and creditors are essential steps in the conversion process to reflect the new S Corporation status.
  • According to IRS data, around 60% of eligible LLCs opt for S Corporation status to take advantage of its tax benefits.
  • Converting an LLC to an S Corporation, in my opinion, can be a strategic move for small business owners looking to optimize their tax situation and enhance their company's credibility.


LLC to S Corp

A man thinking about converting an 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:

  1. 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.
  2. 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.
  3. 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.
  4. 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.
  5. Its shareholders must be individuals, estates, or certain trusts - 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

An office person looking at forms

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.

According to IRS data, around 60% of eligible LLCs opt for S Corporation status to take advantage of its tax benefits.

You can find Form 2553 on the IRS website [1]. You should fill it all up and send it to the IRS. The mailing address is on the form itself.

I found the form on the IRS website was straightforward, but filling it out required a meticulous review to ensure every detail was accurate

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 [2].

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.

Certain industries are subject to stringent regulatory oversight, which can influence the feasibility and desirability of converting from an LLC to an S Corporation.

For example, financial institutions, insurance companies, and international sales corporations face specific restrictions that can complicate or outright prevent such a conversion.

The conversion from an LLC to an S Corporation also carries with it significant tax implications, which can be particularly pronounced in certain industries. For instance, insurance companies and financial institutions may have unique tax considerations that do not apply to businesses in other sectors.

These might include differences in how taxable income is calculated, specific deductions that are available, and the treatment of international operations. A detailed financial analysis can help uncover potential tax benefits or liabilities that could arise post-conversion.

Why Do People Switch From LLC to S Corp?

A man thinking while staring at his computer

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.

According to a study by the National Association for the Self-Employed, approximately 25% of businesses make this switch to leverage potential savings on self-employment tax obligations.

As an S Corp, you can elect to have your business income taxed as personal income, which means you'll only be subject to lower personal tax rates.

My clients found switching to an S Corp status opened new doors for my business, especially when it came to attracting 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.

"Corporations are often favored for facilitating recapitalization and reorganization as a company expands, making them more appealing to investors and certain financial institutions. Additionally, corporations adhere to formalities, often required by state regulations, which provide investors insight into the company's operations."

- Delina Yasmeh, J.D./Tax LL.M, Distinguished Expert in Mergers & Acquisitions

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.

There is no perfect time to convert from LLC to 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, attract investors, or 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.

References:

  1. https://www.irs.gov/forms-pubs/about-form-2553
  2. https://www.irs.gov/forms-pubs/about-form-8832

About The Author

Co-Founder & Chief Editor
Jon Morgan, MBA, LLM, has over ten years of experience growing startups and currently serves as CEO and Editor-in-Chief of Venture Smarter. Educated at UC Davis and Harvard, he offers deeply informed guidance. Beyond work, he enjoys spending time with family, his poodle Sophie, and learning Spanish.
Learn more about our editorial policy
Growth & Transition Advisor
LJ Viveros has 40 years of experience in founding and scaling businesses, including a significant sale to Logitech. He has led Market Solutions LLC since 1999, focusing on strategic transitions for global brands. A graduate of Saint Mary’s College in Communications, LJ is also a distinguished Matsushita Executive alumnus.
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One thought on “How to Convert an LLC to S Corporation? (2024 Upd. Guide)

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