How to convert an LLC to an S corp in 2024 (2024)

Corrections & Clarifications: An earlier version of this article misidentified Grellas Shah LLP. It has been corrected.

Small business owners often organize as a limited liability company (LLC) due to benefits like personal liability protection and management flexibility. However, you may outgrow your LLC. As your balance sheet grows, you may consider forming an S corp to save on self-employment taxes and take advantage of its other benefits, such as raising capital more easily. This article overviews how to convert your LLC to an S corp.

What are the IRS eligibility requirements to switch from an LLC to an S corp?

To convert your LLC to an S corp, your business must meet the S corp requirements as outlined by the IRS:

• You must be a domestic corporation.
• Your business must only have allowable shareholders, such as individuals, certain trusts and estates.
• Shareholders cannot be partnerships, corporations or non-resident aliens.
• You cannot have more than 100 shareholders. Families and married couples are treated as one shareholder.
• You must have only one class of stock.
• You cannot be an ineligible corporation, which includes insurance companies, sales companies and certain financial institutions.

These are only general guidelines based on federal requirements. Specific requirements for forming an S corp may vary depending on state and local regulations.

4 steps to change an LLC to an S corp

To switch from an LLC to an S corporation, complete the following steps:

1. Check for eligibility

Your business should meet the eligibility requirements outlined in the previous section. If it doesn’t meet any of those criteria, you may not be eligible for S corp status.

2. Fill out form 2253

To form an S corp, you must file IRS form 2253, election by a small business corporation. The form is used to elect S corp status for federal tax purposes. In preparation for filling out this form, gather the following information:

• Your LLC’s name, address and employer identification number (EIN).
• Your desired type of tax year and when it begins.
• The contact information and title of an officer the IRS is authorized to contact about the change.
• All shareholders’ (owners’) names, addresses, number of shares, Social Security numbers and signatures.

3. File on time

You may submit the form for free to the address listed in the form instructions (based on your state). For example, if your business operates in Connecticut, you must send the form to the Department of the Treasury Internal Revenue Service in Kansas City, Missouri. However, if you live in Arizona, you must send the form to the Department of the Treasury Internal Revenue Service in Ogden, Utah.

You must file the form by the deadline, usually no more than two months and 15 days after the beginning of the tax year.

4. Comply with state requirements

Different states have different processes for converting an LLC to an S corp. For example, in California, you must file new articles of incorporation with a statement of conversion. The fee to convert is $150. However, in Virginia, you must file form LLC1085-CORP-DOC and pay a minimum $25 fee to convert an LLC to an s corp.

Therefore, you should consult with a qualified tax attorney or tax professional to ensure compliance with all applicable conversion regulations in your state.

LLC vs. S corp: Key differences

LLC vs. S corp: Tax implications

LLCs and S corps are similar in some ways and quite different in others. Before opting for one or the other, consider the best fit for your business. More specifically, consider the tax implications.

LLCs are pass-through entities for tax purposes, meaning profits and losses flow to the owners’ personal tax returns. S corps are also pass-through entities, but owners can avoid some self-employment tax. They must pay themselves a reasonable salary, subject to payroll tax. They can then distribute the remaining profits as dividends, which are not subject to self-employment taxes as profits are under an LLC.

LLC vs. S corp: Ownership restrictions

Generally, LLCs offer more flexibility in ownership structure than S corporations. For example, LLCs can have an unlimited number of owners. In addition, owners can be individuals, other LLCs, corporations or non-resident aliens.

Conversely, there are several ownership restrictions on S corps. They’re limited to 100 shareholders, and shareholders must be U.S. citizens or resident aliens. Ownership also cannot be a corporation or most types of trusts.

LLC vs. S corp: Raising capital

Converting an LLC to an S corporation opens up new avenues for raising business capital. While an LLC cannot raise capital by selling stocks to shareholders (owners), an S corporation can have up to 100 shareholders (owners) and sell one type of stock. The company raises money by selling stock to invest in business operations and growth. In addition, banks are more likely to lend to an S corp than a sole proprietorship or partnership LLC.

LLC vs. S corp: Management structures

LLCs also have more management-structure flexibility. They can be managed by members or designated managers who may or may not be owners. On the other hand, S corps have more structured management, including directors and officers.

Another difference is that an S corp exists independently of its ownership or management structure. For example, if a sole proprietor LLC owner passes away, the business ceases to operate. In contrast, if a key shareholder leaves an S corp entity, the S corp continues operating.

“A company that is going to remain owned by a handful of partners with relatively little change in ownership can likely stay as an LLC,” says Mital Makadia, partner at Grellas Shah LLP.

How to keep your LLC entity and receive S corporation tax treatment

An LLC is classified as a partnership or sole proprietorship by default. However, you can opt for an S corp tax election, even while remaining an LLC. This means having the same LLC management structure while enjoying an S corporation’s tax savings. To receive S corp tax treatment, file form 2253 with the IRS within 75 days of your LLC formation.

Remember that you should maintain annual compliance as an S corp. This involves recordkeeping, tax filing and keeping up with reporting obligations. You must file annual tax returns using form 1120-S, U.S. income tax return for an S corporation with the IRS, and record members’ pro-rata shares of corporate income, profits and losses on schedule K of form 1120-S and adhere to other federal and state guidelines.

Our take: Should you convert your LLC to an S corp?

The decision to switch your LLC to an S corp can be complex and depends on factors specific to your business circ*mstances. You must consider the resulting tax implications, ownership restrictions, ability to raise capital and more.

One primary reason to switch to an S corp is the resulting tax savings on self-employment tax. S corps can pay their owners a reasonable salary and only be subject to payroll taxes on that amount. Distributions above that amount may not be subject to self-employment taxes. If you have significant earnings, this tax structure might allow you to save on taxes.

However, there are many scenarios where switching to an LLC may not be the best decision. For instance, if you want ownership flexibility, such as different classes of membership interest and unlimited members, you may be better off with an LLC. S corps also have a maximum of 100 shareholders. If you have more, converting may be difficult or not in your best interest.

S corps also have restrictions on the types of eligible shareholders. Non-U.S. residents and non-resident aliens cannot be shareholders in an S corp. If you have investors who are not U.S. residents, converting to an S corp may not be the best decision.

Frequently asked questions (FAQs)