Cost Considerations
Switching your LLC to an S-Corp can reduce your tax bill. S-Corps are taxed as regular C-Corporations, meaning that the business itself is subject to corporate income tax. LLCs, on the other hand, are not taxed as a separate entity. Instead, the IRS taxes LLCs as if they were sole proprietorships or partnerships.
The difference in how the profits are taxed is the main advantage of converting an LLC to an S corp. If you receive $200,000 as an LLC member, the total amount is subject to self-employment tax. If you receive $200,000 as an S corp employee, you’ll only pay payroll taxes on what you decide is a reasonable salary, say $120,000. The remaining $80,000 will be subject to income tax but not Social Security.
Eligibility and Process
The next step in converting your LLC to an S Corporation is to file Form 2553 with the Internal Revenue Service (IRS). This form must be filed by March 15th of the year in which you want to begin operating as an S Corporation. If you miss the deadline, you may still be able to request S Corporation status, but you’ll need to provide a reasonable cause for the delay.
Decision-making Factors
You should change your LLC to an S-Corp only if the benefits outweigh the costs. Both Limited Liability Companies and S-Corporations have their own sets of benefits. Once a certain tax threshold is met, the S corporation designation will help to allay some of the expansion costs. If you plan to raise a significant amount of external investment and eventually go public, you should choose a corporation with S Corp status because an LLC cannot issue stock.