S Corporation Conversion to LLC: Everything You Need to Know
If you want to learn more about S corporation conversion to LLC, you’ll first want to fully understand the pros and cons of operating an S Corp as well as an LLC. 3 min read
2. Various Business Structure & Tax Choices
3. State Laws for Conversion
4. Reasons for Converting
S Corporation Conversion to LLC
If you want to learn more about S corporation conversion to LLC, you’ll first want to fully understand the pros and cons of operating an S Corp as well as an LLC. Once you know your responsibilities regarding forming and operating each type of business structure, you’ll be able to better determine which type of business is best for you. Sometimes the decision can be quick, depending on how you want to invest in your company. For example, LLCs allow unlimited shareholders, whereas S Corps allow no more than corporations/">75 shareholders.
Most notably, both S corporations and LLCs offer limited liability for the owners and members. Additionally, both types of business structures are not required to pay taxes at the federal level. Keep in mind though, that sometimes S Corps are taxed on passive income.
If you want to operate a business with ease, meaning that you don’t want to have to deal with a lot of corporate formalities or filing fees, then an LLC is probably the better choice for you. Even if you have already formed an S Corp, you can convert your business structure to an LLC.
In most states, you can easily convert your S Corp to an LLC by filing a document declaring as such. You can also create a brand new LLC and merge your S Corp into the LLC.
Various Business Structure & Tax Choices
You want to remember that there are a variety of business structures, and several ways in which to have your business taxed. Therefore, if you want to convert your S Corp to an LLC, you will have to determine if you will be operating a single-member or multi-member LLC. Furthermore, even if you choose to operate as an LLC, you can still be taxed as a different type of business, whether it be a partnership or corporation. This is because LLCs are viewed as ‘disregarded entities,’ which means that you will need to choose what other type of business structure you will be taxed as.
State Laws for Conversion
It will depend on the specific state you are in to determine how to convert your S Corp to an LLC. Different states have the following procedures:
• Some states require that you create a new LLC and subsequently merge your S Corp into that newly created LLC. Thereafter, the LLC is the “survivor” in the merger. Such a merger could be rather complex, and might require legal assistance as there could be rules regarding specific paperwork, transfer of assets, and dissolving of the S Corp.
• Other states simply allow you to convert your S Corp to an LLC by filing a request to convert.
Reasons for Converting
There are several reasons why you might want to convert your S Corp to an LLC, which including the following:
• **Business reasons. The main business reason why an S Corp might want to convert is due to the enhanced limited liability that LLCs provide. Most states have what are called “charging order” statutes that prevent creditors from reaching all of the profits of the LLC. In this case, the creditor can only obtain the amount of capital that the debtor (member) put into the LLC. Therefore, this conversion is incredibly beneficial for those companies with significant assets.
• **Tax reasons. When an S Corp converts to an LLC, the corporation generally must liquidate its assets before conversion, which means that the S Corp has to pay tax on the gains that are realized after the liquidation. While this would be a tax consequence, it can actually be beneficial for an S Corp that eventually wants to convert to an LLC. Instead of letting the assets grow, which would mean additional gains and higher taxes, the S Corp will want to convert right away to avoid paying higher taxes in the future.
• **Investing reasons. If an S Corp wants to bring on a new investor, this will cause the S Corp to terminate, thus resulting in tax implications. Therefore, an S Corp will want to convert to an LLC to avoid such tax consequences.
If you need help converting your S Corporation to an 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, Menlo Ventures, and Airbnb.