S-corporations and LLCs both provide alternatives to the traditional C-corporation form of business organization. S-corporations can sell shares of stock like traditional corporations, but they are limited in size and by the number of shares they can sell. LLCs cannot sell shares of stock; they are run like sole proprietorships or partnerships while enjoying the liability protection of the traditional corporate form. S-corporation stockholders may wish to change their company to an LLC for a variety of reasons. While the process varies slightly by state, there are a few guidelines that apply across all states.
Contact your secretary of state's office, or the office that regulates S-corporations in your state, and ask whether the conversation can be accomplished via a specialized form. If your state does not allow for a quick transition, then you must form a new LLC.
Form a new LLC if your state does not provide a simple conversion process. Choose a new name for your LLC; if you wish to use your current name, you can rename the LLC after the S-corporation has been dissolved. Appoint your LLC members and a registered representative. Consider including all shareholders of the S-corporation as joint members of the LLC if the number of shareholders is within reason. Complete and file your articles of organization with the state and draft an operating agreement to govern the way that members work together and manage the company.
Draw up a merger agreement between the legal owners of both the S-corporation and the LLC. Merger agreements can be lengthy and complicated, and can often take years to finalize. Fortunately, in this situation, the process does not have to be difficult. Simply set forth in the merger agreement that all assets, liabilities, employees, management and operations are to be transferred to the new company to be employed in the same manner as they were in the old company. Specify the new LLC as the survivor in the merger.
Complete and file IRS Form 8832, “Entity Classification Election” to specify your desired tax status as an LLC. LLCs with more than one member can choose to be taxed as a corporation or a partnership, while single-member LLCs have the option of being taxed as a sole proprietorship or corporation. Enter your company's information at the top of the form, then complete lines one through eight to specify your desired classification. Have all LLC members sign and date the form on page two, and then submit the form to the office where you send your company income tax filings.