How to Change Your LLC to An S Corp.

Many entrepreneurs form limited liability companies (LLCs) for the excellent benefits they offer. 

These legal entities have limited liability protections, which shield their assets from their business’s liabilities, and pass-through taxation, which reduces the taxes they must pay.

However, as businesses expand, some owners may find that they’ve outgrown the LLC structure. When this happens, they can change their LLCs’ tax election to an S-corporation.

Below, we’ll discuss how

 to change your LLC to an S corp and explore the benefits of this strategic move. Let’s get started!

What is an S-Corporation?

An S-corporation is a business structure permitted by the Internal Revenue Service (IRS). It’s a type of corporation structured as a pass-through entity, meaning it does not pay taxes. Instead, its owners will report all its earnings and losses on their tax returns and pay taxes. 

This setup allows S-corps to avoid double taxation, which is highly common to traditional corporations.

LLCs vs. S-Corps: Key Differences

Although LLCs and S-corps share the same tax treatment, there are some key differences in how they work. 

For instance, LLCs have a more flexible management structure than S-corps. Since S-corps function similarly to a corporation, they must have a board of directors and officers. Meanwhile, LLCs can choose between a member-managed or a manager-managed structure.

LLCs and S-corps also ha

ve different ownership restrictions. LLCs can have as many members as they want and offer membership to other individuals, LLCs, corporations, and foreigners.

In contrast, S-corps are limited to 100 shareholders and can only have individuals, estates, or specific trusts as shareholders.

There is also a significant difference in how they issue stock. LLCs can issue different classes of stock, but they’re prohibited from selling them. On the other hand, S-corps can only sell one type of stock.

Lastly, LLCs have fewer compliance requirements than S-corps. Unlike the latter, LLCs don’t have to hold annual shareholder meetings or keep accurate minutes of these meetings in their corporate records. All they have to do is file annual reports and pay annual fees to their respective states.

Ultimately, LLCs and S-corps function very differently. You must evaluate your business’s needs and goals carefully and consider how these factors could impact its growth and overall success.

Benefits of Changing Your LLC to an S-Corp

There are several benefits to changing your LLC’s tax election to an S-corp, such as:

Tax Savings

Since LLC owners are not considered employees, they must pay self-employment taxes. This tax covers your Social Security and Medicare and is calculated based on your LLC’s net income. So, the higher your company’s profits are, the more taxes you’ll pay.

Fortunately, you can avoid this by changing your LLC to an S-corp. Once your business has been converted, you can divide your income into salaries and dividends. Since dividends are non-taxable, your tax bill will be reduced significantly.

Easy Stock Transfers

S corporations can easily transfer stocks without worrying about capital gains or complex processes. There’s no need for a formal sale or exchange, which can benefit estate planning.

Attracts More Passive Investors

Like any corporation, S corps can issue stock and attract more passive investors. This feature will make it easier for your business to raise capital.

Establishes Credibility

S-corps can help your business establish credibility by demonstrating your commitment to professionalism. Converting your LLC to an S-corp shows that you are taking proactive steps to formalize your operations.

How to Change Your LLC to an S Corp

Changing your LLC’s tax election to an S-corp involves the following steps:

Check Your Eligibility

The IRS only grants the S-corp tax election to LLCs that meet the following criteria:

• Must be a domestic LLC or corporation.
• Must have allowable shareholders (i.e., individuals, certain trusts, and estates).
• Must have no more than 100 shareholders.
• Must have one class of stock.

Financial institutions, insurance companies, and domestic international sales companies are not eligible for the S-corp status.

File Your IRS Form 2553

Once you’ve confirmed your LLC’s eligibility for the S-corp status, you must submit a completed Form 2553 to the IRS.

This form must be filed on or before March 15 of the year you want the new tax election to be effective. For example, if you want your LLC to be an S-corp by 2026, you must submit Form 2553 before March 15, 2026.

Wait For Approval

After you file your Form 2553, you should receive a determination on your election within 60 days.

File Your Form 1120-S

If the IRS approves your application, you must file your business’s next tax return using the Form 1120-S.

Form 1120-S reports the corporation’s income, losses, dividends, and other distributions to its shareholders. Your form should also include a Schedule K-1, which outlines each shareholder’s percentage of company shares.

Maintain the Requirements

You don’t have to renew your tax election annually to maintain the status. However, you must ensure that your business maintains the IRS requirements. These include holding regular shareholder meetings, keeping accurate minutes of these meetings in your corporate records, filing annual reports, and paying annual fees to your respective states. If not, your business will be converted again to a C-corp or LLC status.

Change Your LLC to an S-Corp Today

Converting your LLC to an S-corporation is a major undertaking for any business. It can significantly affect your taxes, operational structure, and growth potential. So, before you decide, carefully weigh the pros and cons of an S-corp status.

There’s no denying that an S-corporation’s benefits can be appealing, especially for those who want to pay less taxes. But this does not mean it’s the right choice for every business.

S-corporations are required to follow specific requirements, which can be limiting for certain businesses. If you’re having trouble determining whether this tax election is right for you, consult one of Inc. Authority’s business formation specialists today.

Inc. Authority offers free LLC formation assistance to business owners nationwide. Our team of business formation specialists will help you decide whether or not you should change your LLC to an S-corp. 

We will carefully evaluate your needs and goals, ensuring you pick the right tax election for your business.

Change your LLC to an S-corp today with Inc. Authority’s help! Visit our website here to learn more.