If you're looking to change from an S corporation to an LLC, there are some important things to consider. 

Both S corporations and limited-liability companies (LLC) have limited liability. Neither are taxed at the federal level, except that S corporations are taxed on some types of passive income. 

LLCs have the additional advantages of being simplified operations with fewer corporate formalities and flexibility with tax liability. 

Most states have an easy process for changing from an S corporation to an LLC. This procedure can differ depending on the state where you are located, but many states simply require you file a form with the Secretary of State for your operating state.

In some states, you must first form your LLC and then merge the S corporation into the existing LLC. This transaction can be complicated.

A shareholders' resolution will need to be passed by the S corporation authorizing the conversion. Because of the tax consequences that can result from this action, unanimous consent is required to pass this resolution in most states. The conversion process can proceed after the resolution has been passed. Generally, this means you will complete the merger and file a Certificate of Conversion with your state. You will also need to notify the IRS that the conversion has been completed.

Tax Consequences of Converting from S Corporation to LLC

Before you choose to convert your S corporation to an LLC, the tax consequences must be considered very carefully. The IRS will consider your S corporation liquidated even if your merger has been completed or you've filed your Certificate of Conversion.

A capital gain occurs if your the value of your S corporation increases from the time it was formed to when it was converted to an LLC. When a capital gain occurs, the capital gains tax will be levied against your shareholders.

Alternatives of Converting from S Corporation to LLC

If you want to avoid the expensive costs of a merger, or if there is no easy conversion process in your state, you can transfer assets to your shareholders, which would liquidate your corporation. The shareholders will then contribute the assets back to your LLC.

Advantages of Converting from an S Corporation to LLC

There are several advantages to converting to an LLC:

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After conversion, the corporate rules that S corporations observe are eliminated.

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An LLC doesn't have to keep a board of directors, nor does it have to record minutes, because the company can be member-managed.

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For tax purposes, LLCs can be considered either a C corporation or S corporation.

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If there are no taxation requests, the IRS taxes an LLC like a partnership as long as there are multiple members.

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Unlike an S corporation, there will be no double taxation against an LLC if the organization is changed, such increasing ownership to more than 100 members, which would make it ineligible for S corporation tax treatment.

Why Convert to an LLC?

It's not hard to figure out why someone would convert an S corporation to an LLC. 

Membership interests in LLCs are protected from creditors by the “charging order” statutes. Under these statutes, the creditor of a member of the LLC doesn't get the member's interests. The creditor only receives the charge against the economic interest. The creditor doesn't receive any voting rights, but receives any profits the member earns from their investment in the business. For those with substantial company assets, the charging-order protection is very valuable. 

Many S corporations choose to convert for tax reasons. The shareholders may also plan on liquidating the corporation in the future. As the corporation grows and accumulates assets, as well as depreciating them, the tax on the liquidation will continue to grow. A shareholder may also choose this time to liquidate, since the tax liability is smaller.

Existing shareholders may choose to bring in an additional investor, or some other professional assistance. If the investor is a corporation, an LLC, or a foreign entity in relation to the shareholder status, the investor may terminate the S election of the corporation. The conversion of an S corporation to an LLC in advance may be a more desirable option. 

There are many aspects of converting from an S corporation to an LLC. In order to explore all your options, you may want to consult a professional attorney.

If you need help changing from S corporation to an LLC, 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.