It is possible to convert an S corp to an LLC. Some states have no published specific procedure, while other jurisdictions state the process clearly. In those states with official procedures, the process is quite simple. In some states, you simply notify the appropriate agency, usually the secretary of state, stating that you wish to change your company structure from a corporation to an LLC. In other states, you may need to merge the companies and liquidate the S corp.
Typical Steps to Change in States that Have Procedures
Always investigate your state rules for switching from an S corp to an LLC. In those states that have a published procedure, the secretary of state's office will have a fill-in-the-blank form or give you all the information you need to submit a lawful change request. That's it. The change may not be instantaneous, however. Depending on the efficiency of your state employees, you may have to wait for them to officially change your status.
States without Published Procedures
If your corporation resides in a state that has no published rules for S corp to LLC conversion, you may have to be a bit more creative. You can form a new LLC and then merge your S corp into the LLC. You then declare that your LLC is the surviving company. While you typically hear or read about mega-corporations completing mergers with one surviving company, creating a new LLC and merging your S corp is a relatively simple process with the help of an experienced accountant.
Consider the Ramifications
Do not rush into an S corp to LLC conversion. The ease of changing from one legal structure to the other is not a substitute for good business judgment. There are two primary concerns you should address. First, if you already have an S corp, examine the reasons you are considering moving to an LLC. Remember, you can easily switch to a C, or standard, corporation should you wish. Also, you could create a major tax liability for S corp shareholders. Converting to an LLC is treated as a liquidation of the S corp. If corporate assets have increased, the liquidation will treat this increase as income to the S corp shareholders.
Plan before Doing
If your reasons for converting an S corp to an LLC are sound, you should be able to do it fairly easily, but don't act on a whim or spur-of-the- moment desire. For example, if you want to eliminate some of the many paperwork requirements of a corporation, be sure the conversion doesn't save you some aggravation, but cost you longer-term money. Remember, converting to an LLC means your S corp will cease to exist. Should you believe you made a mistake, you will need to re-file all documents to recreate a corporation. You may not even be allowed to use your former name as another corporation may have adopted your formerly valuable company name.