How To Change An LLC To An S-Corp (2024 Guide) (2024)

What Is an S-corp?

An S-corp is not a business structure but a tax election that’s available for both LLCs and corporations. Depending on the profits a business generates, electing to be taxed as an S-corp may save a substantial amount on self-employment taxes.

Consider Whether Changing To an S-corp Is Advantageous

LLCs ordinarily have pass-through taxation, which means that business income and deductions pass through to the LLC members’ or owners’ personal taxes. Single-member LLCs are taxed as sole proprietors and multiple-member LLCs are taxed as partnerships. LLC members will also pay self-employment taxes. Self-employment taxes are the payroll taxes that fund Medicare and Social Security.

Some LLCs, even single-member LLCs, can elect to be taxed as S-corps, however. The business will still have the personal liability protection and management flexibility of an LLC, but it will be taxed as a corporation. In an S-corp, the owners can be company employees. They must be paid a reasonable salary, and they will pay payroll taxes on that salary. However, additional company profits won’t be subject to payroll taxes, only income taxes.

In general, you’ll want to consider converting from an LLC, partnership or sole proprietorship to an S-corp when your profits are greater than the amount that you’d reasonably expect to pay in owner salaries. Depending on your specific tax circ*mstances, this assessment can be complex, so you should discuss it with your tax advisor or accountant.

To be eligible to elect S-corp taxation for your business, you’ll need to meet certain requirements:

• Be a United States business
• Have no more than 100 members and shareholders
• Have only one class of stock
• Shareholders may be individuals and certain trusts and estates
• Shareholders cannot be partnerships, corporations or nonresident aliens

File IRS Form 2553

To convert to an S-corp, you will need to file IRS Form 2553. For the tax election to have effect for the full year, the form may be filed anytime in the previous year until March 15 of the year in which you want the tax election to take effect.

If you have just launched your LLC, you can file IRS Form 2553 within 75 days of formation to be taxed as an S-corp.

It isn’t necessary to change to a corporation to elect to be taxed as an S-corp. If you have a significant amount of profits carried over year to year, you may want to consider changing to a corporation taxed as a C corporation (C-corp), rather than electing to be an LLC taxed as an S-corp.

If you do want to change from an LLC to a corporation for management and formation purposes, you’ll need to change the business formally with your state’s secretary of state. Contact your state for specific requirements and fees.

In general, you’ll want to consider electing S-corp tax status for your LLC if your business is generating sufficient profits to pay a reasonable salary to the members and annual distributions. You should review your specific situation with a tax advisor before making the switch.