S Corp to LLC

Changing an S corp to an LLC-based business structure offers many advantages and many similarities that make them both attractive. There are several factors you should consider before you make a final decision on what you want your business to look like.

What is an LLC?

An LLC is a type of business structure that is authorized by statues in different states. It is designed to allow the limited liability protections offered to corporations with the different tax advantages and the flexibility of operations of partnerships and sole proprietorships.

LLCs provide a limit on personal liability of the individual owners much like the protections afforded to owners of corporations. The personal liability is limited to the individual owner’s investment in the business. With regard to taxation, LLCs with only one member are treated the same as a sole proprietorship. LLCs with more than one member are regarded as a partnership.

An LLC may choose to be treated and taxed as a corporation by filing Form 8832. The Entity Classification Election provides this option. Form 2553 for Small Business Corporation can allow businesses to be taxed as an S corporation. Once you set up your LLC, you can choose to have it treated like an S corporation.

What is an S Corp?

An S corporation is a type of corporation that is formed when you comply with state incorporation rules that choose to pass through the company’s income, deductions, losses and credit to the owner of the business for the purpose of taxation. The owners of S corporations will report the income and losses of the business on their own tax returns and are subsequently assessed the tax on personal income tax rates.

The money paid to the owners and the employees will have FICA, Social Security and Medicare withheld from their pay. The other net earnings are passed through to the owners and are considered dividends. Those payments are not subject to SECA tax and are not considered a form of passive income.

If your LLC is operating as an active trade and payroll taxes are high, an S corporation election is an ideal option.

Tasks Associated with Creating and Running a New LLC

There are some things you must do when running an LLC, including the following:

  • Creating your LLC’s operation agreement
  • Contacting customers, clients, and anyone your business works with about your new status of LLC
  • Hold any LLC meetings that are required, such as those with members and managers
  • Maintain the minutes of LLC meetings
  • Do not mix LLC and personal finances
  • Use your official LLC name on all documents your business uses to correspond
  • File all annual reports that are required by your state

The Similarities of LLC and S Corp

There are many similarities between LLCs and S corps, including the following:

  • Both offer limited liability protection. In both situations, owners are not going to be held personally responsible for the liabilities and debt of the business.
  • Both are separate entities that are formed by filing with your state.
  • They offer pass-through taxation. S corps have to file a business tax return. LLCs file a business tax return only in the event that the LLC has more than one member. No taxes are paid at the business level with pass-through taxation. All business profits and losses are passed to the owner’s personal taxes. All taxes are paid individually.
  • They are subjected to all formalities mandated by the state, including filing annual reports and fee payments.

LLC vs S Corp

Both LLCs and S corps are similar, but they also have features that may be more attractive than the other.

LLCs are superior to S corporations with regard to administration and operation. It is also better when allocating the percentage of losses and profits between all the members.

S corporations are better than LLCs with regard to flexibility when paying out earnings to the owners in either earned income, salaries or wages. They are also better with regard to tax planning.

Compare LLC vs S Corporation: Ownership

LLCs are allowed to have as many members they wish. S corps cannot have more than 100 owners. Those who are not residents of the United States can be a member of an LLC. S corps shareholders have to be U.S residents. S corporations may not be owned by a C corporation, a different S corporation, an LLC or any partnerships. LLCs are not tied down in this way.

If you need help with transferring an S corp to 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, Stripe, and Twilio.