Key Takeaways

  • To make an LLC an S Corp, you must first elect to have your LLC taxed as a corporation by filing IRS Form 8832, then file Form 2553 to elect S Corp status.
  • The election must be made within 75 days of the effective date of corporate taxation or within 12 months after the LLC becomes eligible.
  • LLCs benefit from S Corp election through self-employment tax savings and potential increased credibility with investors and clients.
  • However, S Corp status comes with stricter ownership rules, such as limiting shareholders to 100 U.S. citizens or residents and allowing only one class of stock.
  • LLCs electing S Corp status must adjust their operating agreements and recordkeeping practices to meet corporate compliance standards.
  • State-level procedures, such as filing amendments or updating business licenses, may also apply depending on your jurisdiction.

An LLC electing S corp status typically occurs when the LLC owners prefer the administrative structure of a limited liability company but would like to be treated as an S corp, or partnership, for tax purposes. S corp status is often preferable because the owner will not be required to pay self-employment tax on income and distributions from the partnership.

An LLC owner simply needs to select the appropriate box on his or her tax forms to be considered a corporation. All assets and liabilities will be transferred to the corporation in exchange for stock, which is then liquidated and distributed to the owner or owners. This transaction is tax-free provided that the LLC does not have more liabilities than assets.

After designated corporate status, the LLC can elect S status if its members are allowed to hold stock. The LLC owner must file IRS Form 8332, Entity Classification Election, unless he or she has already properly filed Form 2553 in a timely manner. This must occur no more than 75 days before and fewer than 12 months after the date of filing for corporate taxation status, and the status change can be retroactive for up to 75 days.

S corporation rules require a new corporation to elect S corp status within three months of the corporation activation date, by the 15th day of the month. This is also the earliest date on which the new S corp can conduct business, acquire assets, or have shareholders. An LLC that wants to elect S corp status should follow these guidelines:

  • File ONLY Form 2553 if you want to become an S corporation and elect corporate taxation treatment on the same date. This form should be filed based on official S corp guidelines.
  • Attach a statement indicating that you are electing to be taxed as a corporation under Section 301.7701-3(c)(1)(v)(C).
  • The form should be filed by either 75 days or 2 months and 15 days after the S election is effective, whichever is earlier. This allows you to confirm to both filing limits.
  • You don't have to file on the first day of the calendar year. You can make a midyear election but should not do so before you conduct business or acquire assets and members.
  • Use section F to determine whether your business year will be a calendar year or a 52- or 53-week year that ends in December. You can also calculate your tax year based on the date you became the LLC owner or the date you began conducting business.
  • After filing Form 2553, you'll be classified as a corporation as of the date your S corp becomes effective. 
  • You cannot change your classification again within 60 months without IRS permission.

When electing S status for your LLC, the business's operating agreement and other legal documents must follow S corp guidelines. This means that all documents treating the LLC as a partnership must be replaced or amended.

An S corporation is often the best election for LLCs that are very active and/or subject to high payroll taxes. This structure allows you to enjoy the tax treatment of a corporation with the administrative benefits of an LLC, including fewer forms, filings, meetings, and record-keeping requirements and lower costs. 

From a tax standpoint, your LLC exists separately from you as an individual. This means the LLC can pay you a salary, which is subject to FICA and other withholdings. Additional income can then be distributed as passive dividends, which are not taxed as payroll. This allows you to choose the most advantageous individual and business tax situations. 

Before the submission of Form 2553, all LLC members must consent to this categorization.

Relief for Missed S Corporation Elections

If an LLC owner misses the deadline for S corporation election, he or she can apply for relief under Rev. Proc. 2013-30 without charge. 

Step-by-Step Process for Electing S Corp Status as an LLC

To understand how to make an LLC an S Corp, it helps to break the process into clear steps:

  1. Confirm Eligibility:
    Your LLC must meet S corporation requirements—having no more than 100 shareholders, all of whom must be U.S. citizens or residents, and issuing only one class of stock.
  2. Elect Corporate Tax Treatment (Form 8832):
    If your LLC is currently taxed as a partnership or sole proprietorship, you must first file IRS Form 8832 (Entity Classification Election) to be taxed as a corporation. This is the first step in transitioning to S Corp taxation.
  3. File S Corp Election (Form 2553):
    Once the LLC is classified as a corporation, file IRS Form 2553 (Election by a Small Business Corporation) to elect S corporation status. This must be done:
    • Within 75 days of the start of the tax year when you want the election to take effect, or
    • Within 12 months after the LLC first becomes eligible.
  4. Obtain Member Consent:
    All LLC members must consent in writing to the election. This consent is typically recorded in the operating agreement or meeting minutes.
  5. Update Operating Agreement:
    Revise your operating agreement to reflect the new corporate structure. This includes provisions for stock ownership, voting rights, and officer duties consistent with S Corp requirements.
  6. Notify State Agencies:
    Some states require you to file a notification or amendment when changing tax classification. You may need to update your business license, state tax registration, and annual report filings accordingly.
  7. Maintain Corporate Formalities:
    Adopt practices consistent with corporate governance—such as holding annual meetings, maintaining separate financial records, and issuing W-2s for employee-shareholders.

Potential One-Class-of-Stock Issues

An LLC cannot elect S corp treatment if it allows pass-through of income or loss to members in its operating agreement. That's because this would constitute multiple classes of stock. In an S corporation, all outstanding shares of stock must carry identical distribution and liquidation rights regardless of voting rights. Allocations that are not based solely on ownership percentage are not allowed by S corp guidelines.

Benefits and Drawbacks of Electing S Corp Status

Electing S Corp taxation offers several financial and operational advantages, but it’s not ideal for every LLC.

Benefits:

  • Reduced Self-Employment Taxes: Owners can classify part of their income as salary and the rest as dividends, paying FICA taxes only on the salary portion.
  • Pass-Through Taxation: S Corps avoid double taxation; income and losses flow through to owners’ personal tax returns.
  • Enhanced Professional Credibility: S Corp status can lend legitimacy when dealing with investors, clients, or lenders.
  • Potential State-Level Savings: In certain states, S Corps pay less in franchise or business taxes compared to LLCs taxed as partnerships.

Drawbacks:

  • Stricter Ownership Restrictions: Only individuals (not corporations or partnerships) can be shareholders, and all must be U.S. residents.
  • Increased Administrative Duties: Payroll setup, shareholder documentation, and IRS compliance create more paperwork.
  • Possible Loss of Flexibility: Unlike LLCs, S Corps must distribute profits according to ownership percentages.
  • State Variations: Not all states recognize federal S Corp status automatically. You may need to file additional forms at the state level to ensure alignment.

State Considerations for LLCs Electing S Corp Status

Each state has unique rules regarding LLCs electing S Corp status. For instance:

  • Florida: LLCs electing S Corp status must ensure compliance with Florida Department of State filing requirements and update operating agreements to reflect corporate governance rules.
  • California and New York: Both states impose additional franchise taxes or fees on S Corps.
  • Texas: No state income tax applies, but LLCs and S Corps must still file franchise tax reports.
  • Illinois and Massachusetts: You must notify state tax authorities of the election to align your federal and state classifications.

LLC owners should review both IRS and state-level rules before electing S Corp status to avoid compliance issues and penalties.

Frequently Asked Questions

  1. How long does it take to make an LLC an S Corp?
    The process typically takes a few weeks, depending on how quickly the IRS processes your Form 2553. Retroactive elections can apply within 75 days of the filing date.
  2. Do I need to dissolve my LLC to become an S Corp?
    No. You do not dissolve your LLC—you simply elect to have it taxed as an S Corporation. The business structure remains an LLC legally, but it’s treated as an S Corp for tax purposes.
  3. What happens if I miss the S Corp election deadline?
    You can request relief under Rev. Proc. 2013-30, which allows late elections if you meet eligibility and reasonable cause requirements.
  4. Can a single-member LLC become an S Corp?
    Yes. A single-member LLC can elect S Corp status if it meets eligibility rules and the owner files both Form 8832 and Form 2553.
  5. What are the main tax advantages of an LLC taxed as an S Corp?
    The biggest advantage is reducing self-employment taxes by splitting income into salary (taxed for FICA) and dividends (not subject to payroll tax).

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