How to Change an LLC to an S Corporation

Before you learn how to change an LLC to an S Corp., you must first understand both types. Small business owners often start their companies as LLCs because of the flexibility they provide and the limited reporting requirements. But as their business grows, small business owners may find themselves wanting to change from an LLC to an S corporation, sometimes abbreviated to S corp. S corporations can offer company shares, making it easier to transfer ownership. In addition, the owners of an S corporation can save money on self-employment taxes.

The good news is that switching from an LLC to an S corporation is a simple process in many states. When you change an LLC's tax status to an S corporation, the legal status remains the same. The only thing that changes is the way your business functions and the way you pay your taxes.

When you are registered as an LLC, the IRS does not recognize the company as a taxable entity. Instead, it bases the taxes on the structure of the members of the company. If the LLC has a single member, the IRS treats it as a sole proprietorship, and tax filing is done on the sole member's personal tax return. If the LLC has multiple members, the income taxes are filed as a partnership.

The IRS follows different rules to determine how an LLC will be taxed. To have your business treated as an S corporation, you must file Form 8832 to inform the IRS that you no longer want your LLC to be taxed as a partnership or sole proprietorship. When you file your 8832, you need to indicate the first day of the tax year in which your S corporation status went into effect. This allows the IRS to continue to classify your company according to its previous rules until the effective date that the S corporation tax year begins.

LLC vs. S Corporation

LLCs, S corporations, and C corporations are the way business entities are classified for tax purposes. Under federal tax law, an LLC is treated as either a partnership or a sole proprietorship. If classified as an S corporation, the company passes such things as income, losses, deductions, and credits to individual shareholders for federal tax purposes.

S corporations and LLCs both limit the personal liability of owners for certain business obligations, but the management and ownership structures are different. Some of the differences between S corporations and LLCs include the following:

  • An S corporation has officers.
  • An S corporation has a board of directors.
  • An S corporation requires more recordkeeping and regular reporting.
  • An S corporation is required to hold annual shareholder meetings.

If a company is a corporation, it can transfer shares more easily. This is what makes corporations more attractive to outside investors. With an LLC, it can be more difficult to transfer ownership.

If you choose to have your business treated as an S corporation for tax purposes by the IRS, the structure of the organization under state law does not change. Your business will remain an LLC for everything but tax purposes. However, you must meet certain requirements to change your company from an LLC to an S corporation.

Why Change From an LLC to an S Corporation?

What is unique about LLCs is that they don't have a specific federal income tax classification. The IRS deems them "disregarded entities" and taxes them as partnerships or sole proprietorships.

However, an LLC can choose to be classified by the IRS as an S corporation or C corporation for tax purposes. An LLC and an S corporation are similar in that they are pass-through entities, meaning the income passes through the business to the owners. In an LLC, the expenses and income go through the personal tax returns of the owner, making the owner responsible for paying personal taxes on any profits. An S corporation provides pass-through taxation, as well. Compare this to a C corporation, which pays corporate income taxes; its shareholders pay personal income taxes on their distributions.

If you need help changing an LLC to an S corporation, 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, Stripe, and Twilio.