Converting LLC to S Corporation
You can change your limited liability company (LLC) to an S corporation (S corp) by filing Form 2553 with the Internal Revenue Service (IRS). While there are pros and cons to both structures, there are advantages that an S Corporation can offer over an LLC, including lower taxes. S Corporations have pass-through taxation, so income is not subject to self-employment tax.
To change your LLC to an S corporation, you must meet specific requirements and file the appropriate forms. The first step is filing Form 2553, which must be filed by all shareholders and signed by the president. This form must be filed by the 15th day of the third month of the tax year in which the election is to take effect.
Newly formed LLCs can file an S corp election within two months and 15 days from the start of the first tax year. In some cases, late S corp election filing is possible with valid reason. Whether setting up a new LLC or having been in business for a while, an LLC to S corp conversion can save money, but the decision is complicated, so legal and financial advice is recommended.
Differences between LLC and S-Corp
An S-Corporation is a tax status, not a legal entity. Both an LLC and incorporated business can elect S-Corp status. The difference between an LLC and S-Corp is that with an S-Corp owners do not pay self-employment tax on distributed profits, only income tax.
Steps to Convert an LLC to S-Corp
To convert an LLC to an S-Corp, first dissolve the LLC and transfer assets back to the owner. Then form a new S-Corp and contribute assets. This involves filing a new entity and related expenses. For eligibility details, consult a tax expert. Because tax consequences can be significant, consult a tax advisor before any conversion.