Can I Change My LLC to an S-Corporation?

By Joseph Nicholson

An LLC is an entity created under state law for federal tax purposes, and can be treated as a sole proprietorship, a partnership or a corporation. An S-corporation is an entity that passes corporate income, losses, credit and deductions to its individual shareholders for federal tax purposes. Choosing your business to be treated as an S-corporation by the IRS does not change its organization under state law as an LLC. Certain limitations must first be met before you change your LLC into an S-corporation.

Restrictions

To meet the restrictions imposed by the IRS on entities looking for a designation as an S-corporation, your LLC must be a domestic entity with only one class of stock, and have fewer than 100 members that are considered shareholders of the putative corporation. Those shareholders can include individuals and certain types of trusts and estates, but may not include partnerships, corporations or nonresident aliens. Additionally, certain types of regulated businesses, such as certain financial institutions, insurance companies and international sales corporations, cannot elect for S-corporation treatment. Meeting these requirements may involve making some changes to the structure and ownership of your LLC.

Re-Classification

Use IRS Form 8832 to instruct the IRS on how to classify your business entity. As an LLC, your election can be any one of the three types recognized by the IRS for this type of entity. If you have already classified your LLC to be taxed as a corporation, you do not need to refile Form 8832. However, if your LLC was previously being taxed as a partnership or sole proprietorship, you must file Form 8832 and mark box 6a to elect taxation as a corporation. If your LLC is a foreign entity, you cannot change your LLC into an S-corporation.

Ready to start your LLC? Start an LLC Online Now

Forms and Time Frame

Use IRS Form 2553 to elect to be an S-corporation. For the election to take effect in the current tax year, it must be filed not more than two months and 15 days from the beginning of the tax year. Otherwise, the election will take effect in the following tax year. All members owning a share of the LLC on the day of election for treatment as an S-corporation must sign the election form. You must file Form 1120s as the tax return for the LLC in the tax year in which your election for S-corporation treatment takes effect.

Effects

The most notable effect of electing for federal tax treatment as an S-corporation is that you will no longer be subject to the self-employment tax levied on general and limited partnerships. [You will, however, be required to pay a reasonable salary to anyone who provides services to the LLC, including members, and these payments are taxable wages even if paid as distributions or dividends. You will not need a need a new Employer Identification Number, or EIN, as a result of electing for taxation as an S-corporation.

Ready to start your LLC? Start an LLC Online Now
Advantages of LLC vs. an S-Corporation
 

References

Resources

Related articles

How to Convert an S Corporation

S corporations elect to pass corporate income, losses, deductions and credit through to their shareholders for federal tax purposes. An S corporation is taxed under Subchapter S of the Internal Revenue Code, meaning that the corporation pays almost no federal income taxes. If a corporation qualifies for S corporation status, it may obtain S corporation tax status by filing Form 2553 with the IRS. In some cases, however, it may be advantageous to revoke S corporation status -- for example, if the company wishes to add shareholders so that the number of shareholders exceeds 100, it would no longer qualify for S corporation status.

How to Change the Name of an LLC With the IRS

A limited liability company, or LLC, is a form of business association that combines the pass-through taxation and flexibility of a partnership with the limited liability of a corporation. The Internal Revenue Service does not recognize LLCs for the purposes of federal taxation, instead classifying them as a corporation, sole proprietorship or partnership. If you have changed the name of your LLC, reporting your name change to the Internal Revenue Service generally only requires indicating this on the company’s yearly tax return.

How to Convert a C Corporation to an S Corporation With Shareholder Approval

A regular corporation, also known as a C corporation, can make an election with the Internal Revenue Service to receive special tax treatment as a small business corporation under Subchapter S of the tax code: The C corporation is then considered an S corporation. This designation changes only how the corporation is treated for tax purposes. The IRS has established a list of requirements that a C corporation must be able to satisfy to qualify for the election. An S corporation can have a maximum of 100 shareholders, none of those shareholders can be limited liability companies, corporations, or nonresident aliens, and it can have only one class of stock. The IRS requires all shareholders to consent to the election in writing.

LLCs, Corporations, Patents, Attorney Help LLCs

Related articles

Tax Consequences of Converting a C-Corp to an S-Corp

Corporations are business entities formed under state law that exist separately from their owners. An S corporation is ...

What Forms Do I Need to File for an S Corp?

An incorporated business is automatically designated by the Internal Revenue Service as a C corporation for income tax ...

How to Change From an LLC to a Sub S Corp

Whereas an LLC, or limited liability company, is a business entity formed under state law, a subchapter S corp is a tax ...

How to Change an LLC Filing as an S Corp to a Sole Proprietor

A limited liability company, or LLC, is a business structure defined by state law which protects its members from ...

Browse by category
Ready to Begin? GET STARTED