Many entrepreneurs and small business owners set up their businesses as LLCs due to their easy formation process, flexible taxation, and personal liability limits. S-corporations offer similar benefits, including a level of personal liability protection, and there may be circumstances in which an S-corporation (or S-corp) provides more advantages. Let’s take a look at how you can convert your LLC into an S-corp and the benefits of doing so.

Before you change your LLC

What is an S-corp?

An S-corp is a tax election that’s available for both LLCs and corporations; depending on the business structure and profits you generate, electing to be taxed as an S-corp may save a substantial amount of money, particularly on self-employment taxes.

Consider whether changing to an S-corp is advantageous

LLCs typically use pass-through taxation. When taxation is passed through, it means that business income (and related deductions) pass through to the LLC owners’ (or members’) personal taxes, appearing on their tax returns. Single-member LLCs pay taxes as sole proprietors, and multi-member LLCs are taxed as partnerships. LLC members pay self-employment taxes, which fund social security and medicare. LLC profits are passed through on personal tax returns.

Some LLCs may be elected to S-corp status, however. The business retains most personal liability protection and management flexibility, but it’s taxed like a corporation. In an S-corp, the owners can be considered company employees, they must be paid a ”reasonable” salary, and payroll taxes will be due. However, additional company profits won’t be subject to these taxes (only income tax is due). Generally speaking, you should consider converting from an LLC, sole proprietorship, partnership, etc., to an S-corp if your profits are higher than the amount you expect in owner salaries. Assessing this can be complicated, and tax law may vary from state to state. You should discuss this with a professional tax advisor or accountant. 

Confirm your business is eligible to operate as an S-corp

Not all businesses can operate as an S-corp. LLCs are more flexible, and S-corps have extra rules, including the following requirements: 

  • Be U.S.-based 
  • Have less than 100 members/shareholders
  • Have only one class of stock
  • You must pay all owners a reasonable salary
  • Shareholders can’t be corporations, partnerships, or other business entities
  • Nonresidents and non-U.S citizens aren’t eligible to be shareholders
  • Shareholders can be trusts or estates

How to have an LLC taxed as an S-corp

You’ll need to follow specific processes to register your LLC as an S-corp. Start with the following steps: 

File Form 2553

You’ll need to file IRS Form 2553 to convert to an S-corp. You must file it before March 15 of the year in which you want the tax election to apply. If your LLC is a new business, you can file IRS Form 2553 within 75 days of formation and be taxed as an S-corp. Follow the steps below to file IRS Form 2553: 

How to complete Form 2553:

Part I

The first part of the form includes submitting your business’s name, address, incorporation details, and tax year. Applicants with less than 100 shareholders may skip section G. There is some assistance for late filers. The final section must include each shareholder’s names, addresses, and information, plus signed consent for the S-corp election.

Part II

If you’ve selected boxes 2 or 4 in Part I, you’ll need to complete part II. You can review the ”specific instructions” part of the IRS instructions to Form 2553, but you may want to consult with your accountant during this process. 

Part III

Part III is only for subchapter S qualified trusts. You’re unlikely to need to complete this part if you’re a small business owner. 

Part IV

The fourth part is seldom used; you should only complete it if a ”late entity classification election was intended to be effective on the same day as the S-corp election”. You should refer to specific instructions or consult your accountant if this is the case. 

Where to send Form 2553:

Where you’ll need to send your completed form depends on the state where your main business, office, or agency is located in. These two predominant state sets are as follows: 

Set 1: 

If you’re operating your business in Delaware, Connecticut, Georgia, Indiana, Illinois, Kentucky, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, Michigan, North Carolina, Ohio, Pennsylvania, Rhode Island, South Carolina, Tennessee, Vermont, Virginia, Washington D.C. or West Virginia, you should send your completed Form 2553 to: 

Department of the Treasury

Internal Revenue Service

Kansas City, MO 64999

Form 2553 Fax Number

(855) 887-7734

State Set 2:

If your business operates out of Alaska, Arizona, Arkansas, Alabama, California, Colorado, Florida, Hawaii, Iowa, Idaho, Kansas, Louisiana, Minnesota, Missouri, Mississippi, Montana, Nevada, Nebraska, New Mexico, North Dakota, Oklahoma, Oregon, South Dakota, Utah, Texas, Washington or Wyoming, you should send your completed form 2553 to: 

Department of the Treasury

Internal Revenue Service

Ogden, UT 84201

Form 2553 Fax Number

(855) 214-7520

How to convert business formation from a limited liability company to an S-corp

You don’t need to completely change to a corporation to be taxed like an S-corp. Still, if you do have a vast amount of profits year to year, you might want to consider being taxed as a traditional corporation (or C-corp) rather than electing to be an LLC. If you want to change from an LLC to a corporation for management or business formation purposes, you’ll need to change formally with the secretary of state. Check your local Secretary of State guidelines and consider professional advice before proceeding.

S-corporation and C-corporation differences 

When considering the differences, it mostly comes down to taxes. With a C-corp, income is taxed twice. You’ll be taxed at a corporate level and again on a personal level when owners receive income (in the form of dividends) with an S-corp; income isn’t taxed at the business level but only as distributions pass through to the owners. 

How to know if the S-corp tax election is right for you

You should consider your business structure carefully, but one of the considerations is how much profit you generate. If your business generates enough profits to pay an adequate salary (plus annual distributions), you may want to register as an S-corp. You can discuss your specific circumstances with a professional tax advisor. 

Wrapping up 

If you want your LLC to be taxed like an S-corporation, it’s quite simple to register it. Still, it may not always be beneficial. S-corporations have more restrictions than common LLCs, nonresident aliens can’t form part of your S-corp and you may become liable for double taxation, and you should always consult a professional before deciding if it’s a good idea to change your business’s legal status from LLC to S-corp.

About The Author

Scroll to Top