How to Change Your LLC to an S Corp (2024 Step-By-Step Guide)

Many business owners start as a limited liability company (LLC). Yet, as businesses expand, the transition from LLC to S corp becomes a practical option.

When the business has significant assets and income, forming an S corporation can help save on self-employment taxes. 

This article will guide you on how to change your LLC into an S corporation.

LLC vs. S Corp

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Starting a small business involves making key decisions, one of which is choosing the right legal structure. 

Most business owners gravitate towards forming a Limited Liability Company (LLC) because it’s simple, offers protection, and provides flexibility. 

But as businesses evolve, some consider switching to an S corporation (S corp) for tax benefits. 

The primary benefit of switching from an LLC to an S corp is the avoidance of self-employment taxes and double taxation.

When an LLC operates under the default taxation of a sole proprietorship (for single-member LLCs) or a partnership (for multi-member LLCs), the owners are considered self-employed. 

As a result, they are subject to a 15.3% self-employment tax, which covers Social Security and Medicare taxes, on the entirety of the business’s profits, up to the current federal limits.

However, opting to have their LLC taxed as an S corporation eliminates “self-employment tax”. The S corp allows owners to become employees of their own company, also known as “shareholder-employees”.

The IRS requires shareholder-employees to pay themselves a “reasonable compensation” for the work they do, in line with what others in similar positions earn.

The company must pay shareholder-employees a W-2 salary subject to Social Security and Medicare taxes.

But instead of paying those taxes on all business profits, it is limited to the wages taken by shareholder-employees.

While payroll taxes are an additional cost to S corp owners, these costs may be 50-70% less than the self-employment taxes paid under the default LLC.

Because of this, many LLCs elect to be taxed as an S-Corp to save more money in taxes. However, there is much more to consider when changing from an LLC to an S Corp.

Should You Convert Your LLC to an S Corp?

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An S corp may be more beneficial than LLC for tax purposes when the tax benefits exceed the costs.

S corps require additional tax returns, payroll systems, payroll taxes, and administrative costs to operate. These costs can exceed the tax benefits of the S corp itself.

Therefore, you should understand both the potential savings and additional costs of transitioning to an S Corporation. 

In general, most tax CPAs advise clients to switch their LLC to an S corp when company’s taxable income exceed $50,000.

At this income range, the self-employment tax burden is above $7,500 and usually exceeds the additional administration costs.

The more income your business earns, the more beneficial the S-Corp becomes.

Can I Change My Business from LLC to S Corp?

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An LLC cannot elect to be taxed as an S corporation unless it meets certain IRS requirements:

1. It must be a domestic corporation

2. It must not have more than 100 shareholders (owners)

    – Shareholders must be individuals, certain trusts or estates (all members of a

family can be treated as one entity)

    – Shareholders cannot be corporations, partnerships or non-resident aliens  

3. It only has one class of stock/ownership interest

If the LLC does not meet all of these requirements, it cannot convert to an S corporation.

The LLC would first need to restructure itself to comply with the S corp ownership and organizational rules.

How to Change from LLC to S Corp

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Once you’ve identified that an S Corp is the right kind of entity for your business, there are several steps to take:

Step #1: Form an LLC or C Corp

To become an S corporation, your business must first be structured as either a limited liability company (LLC) or a C corporation. 

If you already have an LLC or C corp set up, then you’ve completed that first necessary step to potentially elect S corp tax status.

In case you don’t have an LLC or C corp formed yet, you’ll need to take that step first by registering your business with your state, either directly on your secretary of state’s website or using an online service.

Registering directly yourself is often cheaper, but if you have business partners or complex legal considerations, consulting a professional may be advisable when setting up your legal entity structure.

Step 2: Get an Employer Identification Number for Your Business

After setting up your LLC or C Corp, the next step is to get an Employer Identification Number (EIN).

An EIN is a unique number that the IRS uses to identify your business. It is similar to a social security number for individuals.

If you have filed business taxes before, you can find your EIN on your previous year’s tax return.

If you don’t have an EIN yet, don’t worry – you can apply for free on the IRS’s website.

Simply follow the instructions to complete the application with the required information about your business.

Once the IRS reviews and approves your application, they will issue you an EIN for your business.

Step 3: Fill Out Form 2553

Form 2553 is the form you must complete to elect S corporation tax status for your business. 

This form is straightforward, but if you make mistakes, the IRS may reject your S election.

The first part of the form asks for basic information about your business, like your:

• Business name and address
• Date the business was formed
• State where the business was formed
• Your Employer Identification Number (EIN) that you obtained earlier

Carefully Choose Your S Corp Effective Date

On Line E of the form, you can choose the date you want the S corporation tax status to start. 

This date is very important because it determines how you will file tax returns after that date.

For example, if you want 2024 to be the first year your business is taxed as an S corp, you would enter 1/1/2024 as the effective date. 

Then in the following year, you would file Form 1120S, which is the S corp tax return.

For help on other areas of the form, simply follow the form instructions or get a Tax CPA involved to help you.

S Election Deadline

Technically, the deadline to elect S corp status is March 15th of the tax year you desire it go into effect. 

However, the tax code does allow you to make a “late S Election”. If you file past March 15th, your filing would be considered a late election. 

The IRS allows late elections up to 3 years and 75 days after the desired effective date.

In order to make a late S election, you must have a reasonable explanation for why you are electing S corp status late. 

The IRS lists the circumstances they require:

• Your business must be an eligible entity (LLC or corporation)
• You intended to be an S corporation from the effective date
• You did not file Form 8832 to elect an entity classification
• The only reason for the late election is missing the original deadline
• You did not file any tax returns inconsistent with being an S corp

If you have a reasonable explanation, you must list it in detail on “Line I” of the Form 2553. If the explanation is unacceptable to the IRS, they may not grant your late S election.

If you are uncertain about late elections, get in touch with a tax professional before proceeding to avoid any issues.

Use Ink Signatures

For signatures, use an ink signatures on when signing as the IRS may reject digital signatures. 

Also be sure to list all owners/shareholders with ownership percentages, dates acquired, Social Security numbers, and year-ends on Page 2.

Carefully review the instructions and ensure that you have provided all required information.

If any of the required information is missing, the IRS may disapprove your request.

Step 4: Fax Form 2553 to the IRS

When submitting Form 2553 to elect S corporation status, it’s extremely important to use the most up-to-date instructions from the IRS. 

The fax numbers and mailing addresses can change over time, so having the latest instructions ensures you send the form to the proper destination. 

Carefully review the instructions to find the correct fax number or mailing address based on your state. 

From experience, the IRS tends to respond faster to faxed forms compared to mailed ones. 

However, you can choose to both fax and mail Form 2553, just to cover your bases and guarantee the IRS receives it without a doubt. 

In the end, the most important thing is making absolutely certain the IRS gets your completed S corporation election form. 

To change your LLC to an S corp, the IRS must receive this form and approve it.

Step #5: Wait for IRS Approval

From experience, it can take the IRS anywhere from 8 to 12 weeks to process and finalize your S corporation election after submitting Form 2553. 

Therefore, submitting the form as soon as possible is advisable.

IRS processing times can vary significantly. In some cases, they take even longer than 12 weeks. 

Because of the inconsistent processing times, it’s important to note the date you originally sent in your Form 2553 and supporting information. 

If you don’t receive any confirmation after the typical 8 to 12-week window, you should follow up by calling the IRS to inquire about the status of your election.

It may also be possible they haven’t received your submission. If so, double-check that the fax number or mailing address you used was correct, and consider resubmitting the election.

If all else fails, ask the IRS if there’s anything else you can do to ensure they get your documents or potentially expedite the process. If they take more 120 days to respond to your request, they may escalate the matter on your behalf.

In the meantime, while waiting for the IRS’s final confirmation, make sure you thoroughly educate yourself on all the rules, requirements, and implications of operating as an S corporation. 

Being fully prepared will smooth the transition once your election is complete.

Bottom Line

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Converting your LLC to an S corporation can provide benefits that help position your business for further growth. 

However, like any major business decision, there are potential costs and tradeoffs to consider when converting your entity structure.

Before deciding to convert your LLC to an S corp, it’s important to carefully evaluate the pros and cons as they relate to your specific situation and goals. 

Don’t go through the conversion process until you fully understand the implications.

To ensure you have all the facts, strongly consider consulting with a professional accountant and/or lawyer who can advise you based on your circumstances. 

They can break down the tax impacts, administrative requirements, investor considerations, and any other key factors you need to understand. 

With their expert guidance, you can make an informed decision about whether electing S corp status is the right strategic move for your business’s future growth plans.