Change LLC to S Corp: Everything You Need to Know
To change an LLC to an S corp (S corporation) is a move that intelligent business proprietors looking to reduce tax liability might consider.3 min read
To change an LLC to an S corp (S corporation) is a move that intelligent business proprietors looking to reduce tax liability might consider. After all, it is only a filed form away. By changing your “election,” or business entity filing status on your Form 8832, you can move from a simple partnership or single proprietorship into a corporation and start enjoying some serious tax advantages.
LLCs and S Corporations
First, let us consider how an LLC differs from an S corporation. Basically, an LLC is a filing status for the purpose of state taxes that grants a company some of the advantages of a corporate entity while retaining tax status closer to that of a partnership or sole proprietorship. LLCs are characterized by the following:
- A limit on the liability of owners based on the amount invested rather than the full amount of any debt or damage.
- Simplified forms, both for taxation and for various other purposes.
- Income taxation that allows profits from the business to pass through, counting as personal income made by the owner or owners as additional income rather than being directly double-taxed through both the business and the payout to the individual.
LLCs are not necessarily corporations though, or rather are not required to be corporations — they can declare as a partnership or a corporation through the agencies of the state it is formed in. Different states have different rules and requirements, so you'll likely need the advice of a professional or some more in-depth information on the process to proceed.
An S corporation, on the other hand, is a filing status recognized by the IRS. This makes it a federal matter, not local. S corporations are corporations (not partnerships) that accept certain limitations in exchange for benefits similar in many ways to an LLC. These include:
- Limits on the amount and type of stock issued by the corporation.
- A requirement that stockholders have legal U.S. standing as citizens, resident aliens, or similar status.
- The corporation cannot sell stock to entities other than individuals — in general, no investment funds or other financial formations.
- Certain kinds of businesses are forbidden from claiming S status.
The advantages of an S corporation are limited liability similar to other corporations and the ability to tax profits as pass through income of its owners, which helps reduce liability for payroll taxes in particular.
Making an LLC into an S corporation does not require renouncing its LLC status. An LLC can be an S corporation as long as it is a corporation and not a partnership. The laws of the state of formation will govern the process of conversion to a corporation. Many states have simplified conversion laws. In those states, costs are usually not much more than forming a new company and typically involve filing Articles of Conversion.
If your state of formation does not have these simplified rules, you'll need to instead perform a three step process.
- Create a new corporation with the state using the old name while also canceling the LLC.
- Notify the IRS of the change.
- Fill out the S Election Form 2553 to change the new company to an S Corporation.
Statutory Conversions and Mergers
Some states now allow for statutory conversions, a new way to turn an LLC into a corporation through the filing of some quick forms. Statutory conversions require the filer to get plans approved by LLC members, a simple matter for partnerships and sole proprietorships; when the conversion occurs, the former LLC members are now counted as stockholders. This process folds in the transfer of assets, greatly expediting the movement into the new formation.
If your area does not have a statutory conversion, however, you'll need to look into statutory merger. This filing method requires making the new corporation and then transferring assets and roles on a case by case basis. It also requires you to create the new company before moving assets and ownership around, which can get complicated quickly. While any change to your company or filing status should probably involve a lawyer at some point, the statutory merger is more likely to require more billable hours.
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