Key Takeaways

  • Converting from an LLC to an S Corp allows businesses to maintain liability protection while potentially reducing self-employment taxes.
  • An LLC can elect S Corp taxation by filing IRS Form 2553; a full legal conversion to a corporation is not always required.
  • To qualify, the business must be domestic, have fewer than 100 shareholders, one class of stock, and eligible shareholders.
  • Benefits include tax savings, credibility, and investment appeal—but conversions can create complications such as stricter compliance and payroll obligations.
  • The best time to convert depends on income level, payroll size, and business growth stage.

If you wish to change from LLC to S-corp, it can be a complex process with quite a few steps. However, this process is necessary for anyone who wants to take their business to the next level with S-Corp status. A limited liability company is one of the most common forms of business in the country, but that type of organization doesn't work as well if the business grows too much. 

An LLC or a limited liability company is created through state law and is designated through federal tax laws. An LLC is distinct from a corporation unless forms are filed to change its designation. 

An S corporation is a bit different in that it passes all income, credit, deductions, and losses to shareholders. S corporations are for-profit and have to be designated as such through the IRS. The S corporations themselves don't pay taxes; instead, they file a return showing net gain or loss. That information is funneled through the shareholders. It's important to note that no corporation can be founded as an S corporation. It can only be granted that status by requesting the designation from the IRS.

LLC vs. S Corporation

Both an LLC and an S corporation are types of business entities, but they vary in the way they are run. Remember, the only difference between a C corporation and an S corporation is the way income tax is determined. No matter which type of organization you run, you still have limited personal liability for business obligations. The difference is in the management structure. 

An LLC can be run essentially however you want, while a corporation has a board of directors. Corporations have to report more of their business information, and they have to host meetings for shareholders. A corporation designation also makes it much easier to transfer shares. They can be traded easily, which attracts outside investors. An LLC doesn't have those requirements, making it difficult for outsiders to get involved.

Key Differences in Ownership, Structure, and Compliance

While both entities offer liability protection, the operational and tax rules differ significantly. An LLC provides management flexibility—members can directly manage operations or appoint managers. In contrast, an S corporation must follow corporate formalities such as appointing a board of directors, holding annual meetings, and maintaining minutes.

S corporations also have strict ownership rules: they can only issue one class of stock and cannot have partnerships, corporations, or non-resident aliens as shareholders. LLCs face no such limitations, allowing greater flexibility in ownership structures and profit distributions.

However, S Corps may appeal to established businesses seeking outside investment, since issuing stock and offering payroll-based compensation can simplify fundraising and tax planning.

Corporation Taxation Benefits

S corporations can enjoy some tax benefits compared to regular corporations, such as being able to avoid the double-taxation issue. The owners are treated as employees, so they just get payroll taxes taken from their income. LLCs, on the other hand, don't actually have their own federal income tax classification. The IRS just taxes any single-member LLC as a sole proprietorship and a multi-member LLC like a partnership. 

When an LLC classifies itself as an S corporation, it can be taxed as such, which could be more beneficial. Since LLC owners are taxed as self-employed individuals, electing to have S corporation status could cut down on those taxes, since they save if their share of the profits is larger than their reasonably earned salary. This is due to the Foreign Earned Income Exclusion. S corporations can also set up 401(k) retirement accounts, which cuts down on taxes even more.

Tax Advantages and Considerations When Electing S Corp Status

When an LLC elects S Corp taxation, it can often reduce self-employment tax obligations. Under the default LLC structure, all profits are subject to self-employment tax (15.3%). In an S Corp, owners can pay themselves a “reasonable salary” and take additional profits as distributions—only the salary is subject to payroll taxes, while distributions are not.

However, the IRS requires that the salary be reasonable for the work performed, and failure to comply can trigger audits or penalties. Moreover, S Corp owners must run payroll, file quarterly employment tax returns, and comply with additional recordkeeping requirements.

In some cases, converting to S Corp status may also help small businesses benefit from deductions on health insurance premiums or retirement plan contributions. Yet, certain state taxes—such as franchise or gross receipts taxes—may still apply. Business owners should carefully evaluate whether the savings outweigh the administrative burden.

How to Convert an LLC to an S Corporation

If you're trying to convert an LLC into an S corporation, you'll have to convert to a corporation first, then apply for an S corporation designation through the IRS. There are a few requirements your business must meet if you want to qualify for S corporation status.

  • Must be domestically based
  • Must have fewer than 100 shareholders
  • No shareholders can be a corporation, partnership, or nonresident alien
  • Must only have one class of stock available

If these qualifications are met, many states allow for the statutory conversion process. This allows you to simply transfer the assets to the new classification rather than having to dissolve the LLC. For this, all you have to do is file the correct forms, which are commonly found on the state's website.

States without this process require statutory mergers. This process is a bit more complicated.

  • The corporation must be formed with members of the LLC as shareholders
  • Shareholders swap membership in the LLC for shares in the corporation
  • Must file the required documents
  • Must formally dissolve the previous LLC
  • Must file Form 2553 to obtain S corporation designation from the IRS

IRS Election vs. Legal Conversion: Choosing the Right Path

Many business owners mistakenly believe they must dissolve their LLC and create a new corporation to gain S Corp tax treatment. In most cases, this is unnecessary. The IRS allows an LLC to simply elect to be taxed as an S Corporation without altering its legal status.

To do this, the LLC must first elect to be treated as a corporation by filing Form 8832, and then file Form 2553 to elect S Corporation status. Both forms must be signed by all members. If the LLC meets IRS eligibility requirements, this approach maintains the same state-registered entity while changing its federal tax classification.

Alternatively, some states allow a statutory conversion, where the LLC legally transforms into a corporation under state law. This approach may be preferable for companies seeking equity investment or those restructuring for merger or acquisition opportunities.

Each method has different legal and tax consequences—consulting a tax professional or attorney ensures proper compliance and minimizes exposure to penalties or unintended tax liabilities.

When to Convert LLC to S Corporation

The deadline for a classification change is March 15 for the status to take effect the following year. Whether or not it's the right decision depends on your taxes. If self-employment taxes are more costly than an S corporation's tax burdens, it's probably a good idea to change your LLC to an S corporation.

Evaluating Timing and Common Mistakes

The ideal time to switch from LLC to S Corp depends on revenue, profit margins, and payroll obligations. Generally, once an LLC’s net income exceeds what would be considered a reasonable salary for its owner, electing S Corp status can create tax savings.

However, conversion too early—before consistent profitability—can backfire, as S Corps require regular payroll processing and compliance with IRS filing deadlines (such as March 15 for timely elections).

Common mistakes include:

  • Filing Form 2553 late or incomplete.
  • Failing to pay a reasonable salary to owners.
  • Not updating state or local registrations after election.
  • Overlooking ongoing corporate maintenance duties, such as issuing stock or maintaining minutes.

Additionally, businesses should be cautious if they expect rapid ownership changes or outside investors, since S Corp restrictions may limit flexibility. A strategic review with a CPA can help determine the most tax-efficient year for the election.

Potential Risks and Pitfalls of Converting an LLC to S Corp

While S Corp status offers tax advantages, it’s not always the best choice. According to JD Supra, many conversions are “a mistake waiting to happen” when made without full consideration of tax implications. Improperly structured conversions can lead to unintentional terminations of S status, double taxation, or unexpected capital gains recognition if assets are transferred incorrectly.

An LLC taxed as an S Corp may also lose flexibility in allocating profits and losses among owners, since distributions must match stock ownership. Additionally, failure to comply with S Corp eligibility rules—such as exceeding 100 shareholders or admitting an ineligible member—automatically revokes S status.

Before electing, businesses should assess whether their income level, growth stage, and administrative capacity align with the compliance demands of S Corporation rules.

Frequently Asked Questions

  1. Do I need to create a new corporation to become an S Corp?
    No. In most cases, your LLC can simply file IRS Forms 8832 and 2553 to be taxed as an S Corporation without dissolving or reincorporating.
  2. What forms are needed to change from LLC to S Corp?
    File IRS Form 2553 (and sometimes Form 8832). Check with your state for any additional conversion or registration forms.
  3. When is the deadline to file for S Corp status?
    Generally, by March 15 of the tax year you want the S Corp election to take effect.
  4. What are the main benefits of converting from LLC to S Corp?
    Reduced self-employment taxes, potential tax deductions on benefits, and enhanced business credibility.
  5. Can an S Corp election be reversed?
    Yes. An LLC can later revoke its S Corp election by notifying the IRS in writing, reverting to its previous tax classification.

If you need help with changing from an LLC to an S-corp, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.