How to Change from an LLC to an S Corp

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In most cases, when someone decides to start a business, they often look to forming an LLC, or Limited Liability Company. The reason for this is mostly because they are easier to form and are better when it comes to taxation.

As a company begins to grow in profit, many business owners wonder how they can make their business even more profitable. Because of this, they begin to wonder just how they can switch their LLC over to an S Corporation for a better advantage.

Are you curious about how to switch your business from an LLC to an S Corp? Keep reading to learn more.

What is the Difference Between an LLC and S Corp?

When it comes to forming a small business, it is important to understand that you have choices available to you. Knowing what each type of business entity is and can do for your company can make a huge difference for you.

Are you curious about the difference between an LLC and S Corp? Keep reading to learn more.

LLC (Limited Liability Company)

Include pros and cons

An LLC is the most common type of small business that is registered since it is typically easier to form. Additionally, it is an entity that is designed to protect the business owner from having to take on the liability of the company’s losses.

In essence, an LLC limits the liability that has to do with the business to the business itself, thus keeping the owner from having to pay if things go wrong. Because of this structure, most people who form a small business choose this type of entity since it gives them such protection.

While deciding to form a business, it is important to also know the advantages and disadvantages of the various types of business structures.

Pros:

  • Provides the opportunity to keep your finances separate from your business finances
  • An LLC is easier to form since there is less paperwork involved
  • There is more tax flexibility in forming an LLC
  • You can form an LLC with one or more owners

Cons:

  • Fees to get started can be expensive depending on the state in which you live
  • Raising capital may be more difficult since corporations are typically more favorable to lenders
  • You may be subject to additional taxes depending on the state in which you live

S Corporation

An S Corporation is very similar to an LLC in that they both provide some personal protection when it comes to the business entity. The biggest difference is that in an S Corporation, the protection is geared toward the shareholders in the business.

Additionally, with an S Corporation, there are opportunities for different types of taxation that apply to this entity. An S Corp is allowed to use “pass-through” taxation which means that everything is passed on to the shareholders which helps to avoid double taxation.

Here are some of the advantages and disadvantages of registering your business as an S Corp:

Pros:

  • Since pass-through taxation applies, the company itself does not pay federal taxes at the business level
  • In most cases, an S Corp is seen as a more credible business than an LLC
  • Investors are more likely to consider your company since it is deemed a corporation
  • Ownership shares can be easily transferred from one person to another

Cons:

  • The restrictions are typically much more intense when it comes to shares of the business due to the pass-through taxation
  • Forming the business as an S Corporation can mean more paperwork for you since there are stricter guidelines and more formalities to deal with
  • Filing taxes becomes more complicated and can have severe consequences if mistakes are made.

How to Change from an LLC to an S Corp

If you are wondering how to change your business from an LLC to an S Corporation, you will need to follow very specific steps. Because of this, it is typically recommended that you speak with a legal professional to ensure that you are covering your bases.

If you are wondering how to change your LLC to an S Corporation, read below.

Check Eligibility

One of the first steps in changing your company from an LLC to an S corporation is to ensure that your business is eligible. Since you are choosing to change your business structure to a corporation, there is typically more to do to make it happen.

Here are some of the eligibility requirements that you should keep in mind when wanting to change your business from an LLC to a Corporation.

  • Your business has to be a legal United States company
  • Membership in the business should be no more than 100 members or shareholders
  • The company should have no more than one type of stock
  • Shareholders in the company cannot be partnerships, nonresident aliens, or corporations

Know the Due Dates for Tax Election

Like most IRS guidelines, you will be required to pay attention to the dates that are outlined for changing the status of your company. This is because when it comes to changing your status, there are certain dates that you have to keep in mind.

To be eligible for changing the status of your business, you will need to file the specific paperwork within two months and 15 days following the beginning of the tax year. The IRS requires this information so they know your intent before the actual change.

File the Right Forms

In addition to knowing the dates to keep in mind, those wishing to change from an LLC to an S Corporation need to make sure they fill out the right form. To change from an LLC to an S Corp, you will need to fill out and have all owners sign the IRS Form 2553.

Keep in mind that when you are filling out the IRS Form 2553, all LLC owners are required to sign the form, which can be a difficult task depending on how many there are. Additionally, you should understand that it can take between six to eight weeks for the IRS to complete the process.

When is the Right Time to Switch to an S Corp?

Depending on how your small business is operating, if you have ever thought about restructuring then you should know that timing is everything. This means that as your business grows, it is important to make sure that you are ready for the changes.

As your business grows, so will other fees such as self-employment taxes that you have to pay throughout the year. This happens because self-employment taxes are based on the amount your business is bringing in per year. This is why it may be time to restructure your business.

Another reason you may want to consider switching your LLC over to an S Corp is that it is most likely cost-effective knowing that you are making more profit. Since filing fees vary per state, you also have to deal with other expenses and filing fees which can be easier to deal with once you are making more money.

It may be also time to switch to an S Corp when you want the convenience of operating your company differently. When you become a corporation, the business is owned by shareholders which means that the decision-making process is in the hands of a board of directors, which makes it easier to run the business.

Overall, it is important to understand when you should consider switching from your LLC to an S Corporation. As the business becomes more and more profitable, restructuring your business may be the best way to move the company forward consistently.

What Should You Consider Before Changing From an LLC to an S Corp?

As you decide to change your LLC over to an S Corporation, there are specific factors that you should consider. While there are many advantages and disadvantages to making the change, it is important to ensure that you take a look at all of the options.

Here are some of the most important factors you should consider before changing from an LLC to an S Corporation:

  • The flexibility small business owners have when they operate under an LLC is much easier than when operating with shareholders and a board of directors.
  • When you convert your business into an S Corporation, it is important to keep in mind that there is often more oversight from various guidelines and regulations.
  • When you convert your LLC to a corporation, you often run the risk of the possibility of ownership changes. This can happen when a shareholder decides they want out and sells their shares to an outside party.

While switching to an S Corporation from your LLC has many advantages, it is not something that should be taken lightly. While it can save you and the other members of the LLC quite a bit of money on taxes, many things should be considered first.

Reference Legal Explanations

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  • "How to Change from an LLC to an S Corp". Legal Explanations. Accessed on June 24, 2024. https://legal-explanations.com/blog/how-to-change-from-an-llc-to-an-s-corp/.

  • "How to Change from an LLC to an S Corp". Legal Explanations, https://legal-explanations.com/blog/how-to-change-from-an-llc-to-an-s-corp/. Accessed 24 June, 2024

  • How to Change from an LLC to an S Corp. Legal Explanations. Retrieved from https://legal-explanations.com/blog/how-to-change-from-an-llc-to-an-s-corp/.