Converting LLC To S Corp: Everything You Need to Know
Converting from LLC to S-corp in terms of taxation can be done using Form 8832. 3 min read
2. LLC vs. S-Corporation
3. Why Change From LLC to S-Corporation Taxation?
4. How to Convert LLC to S-Corporation
5. Reclassification of Business Entity
Converting from LLC to S-corp in terms of taxation can be done using Form 8832. By filing Form 8832 with the IRS, you elect to have your LLC taxed as an S-corporation rather than as an LLC.
LLC to a Corporation
Since LLCs are flexible and require fewer formalities, this business structure remains a popular choice. However, as your business grows, you may consider forming an S-corporation. This will allow owners to save on self-employment taxes. Another reason why you would transition from an LLC to an S-corp is to provide shares to potential investors.
If you have been considering this conversion, know that it is possible — and, in most states, straightforward. Once you do change the tax status of your LLC, know that the legal status of your company will remain the same. This means that although you will function as an LLC, you will pay taxes as a corporation.
LLC vs. S-Corporation
Both an "LLC" and an "S-corp" are business entities. There are also C-corporations, which differ from S-corporations for tax purposes.
While focusing on the business structure of an LLC, keep the following in mind:
- This type of business can be treated as a sole proprietorship, a partnership, or a corporation in relation to taxation.
- LLCs are easy to form and are the most common option when establishing a new business.
- If you are a single-member LLC, you will benefit from legal protection and taxation flexibility.
Although LLCs and corporations both offer personal liability protection, they differ in how they are owned and managed. Corporations operate under a management structure of officers and directors, whereas an LLC is managed based on the preference of its owner(s).
Overall, corporations require greater requirements in terms of bookkeeping and reporting. Since corporate shares are easy to transfer from one owner to the next, this is a more desirable business structure when working with outside investors. In comparison, this process is more difficult when operating as an LLC.
If you would like your business to be treated as an S-corp for tax purposes, this will not change the organization of your LLC. Although you will still operate as a limited liability company, this conversion will help reduce employment taxes for profitable companies that follow a simple ownership structure.
Why Change From LLC to S-Corporation Taxation?
LLCs do not have their own classification in terms of federal taxes. The IRS treats single-member LLCs as a sole proprietorship and multi-member LLCs as a partnership. However, LLCs also have the option of being taxed as a C-corp or S-corp.
- S-corporations offer pass-through taxation.
- C-corporations pay taxes on corporate income + shareholders pay taxes on personal income.
Overall, the greatest benefit associated with S-corp tax election is that you will no longer need to pay self-employment taxes in relation to your LLC. With that being said, you will need to pay individuals working for your company a reasonable salary. These payments are considered to be taxable wages — even if you make these payments as dividends. In some cases, corporations are also eligible for additional tax deductions.
How to Convert LLC to S-Corporation
If you believe that this conversion would benefit your LLC, there are two key options you need to be aware of:
- The conversion of an LLC to a corporation
- Seeking S-corp election with the IRS
In terms of the first option, know that not all LLCs are eligible for S-corp taxation. To meet the requirements, you may need to alter the ownership and structure of your LLC. Once you have met the requirements, you will then need to complete a process known as a "statutory conversion." In this case, all of your liabilities and assets will transfer to a corporation. All of the required paperwork can typically be found on your state's business filing agency website.
Since some states do not allow this type of conversion, you may need to undergo a more complicated process known as a "statutory merger."
Reclassification of Business Entity
When instructing the IRS on how to best classify your company, you will need to file Form 8832. If your LLC is already classified as a corporation, you will not need to refile Form 8832. However, if you had previously been taxed as a partnership or sole proprietorship, you must mark box 6a on Form 8832.
If you need help converting your 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.