Perhaps you have been told by a tax advisor that you should have formed an S Corp instead of an LLC. Maybe your business situation has changed and now you need to change your entity from an Limited Liability Company to an S Corporation.
Regardless of your situation, what are your options?
Below are your options for converting your LLC to an S Corporation.
When our customers call us and ask about changing or converting from an LLC to an S Corp., they are speaking about either changing only the tax status of the entity, but not changing the entity, OR changing the entity and tax status. Let’s review each one.
01 Change Federal Tax Status
If you only want to change your entity’s federal tax status, this simply involves your filing one or two forms with the IRS to do so. The IRS allows your entity to change how it will be classified for federal tax purposes (i.e. as a corporation, a partnership, or an entity disregarded as separate from its owner), by making an “election” and filing Form 8832 (Entity Classification Form).
Without filing Form 8832, your LLC is classified under the IRS’ “default rules” for federal taxation purposes. However, if your LLC files this form to be taxed as a Corporation, it cannot change its tax status for less than 60 months.
Once it is classified as a Corporation, it can file a Form 2553 to be taxed as an S Corporation. Both forms must be filed with the IRS to have your LLC taxed as an S Corp.
Warning: An LLC is not a Corporation
Although the IRS may recognize and classify (for Federal tax purposes) an LLC as a Corporation (by filing Form 8832) or an S Corporation (by filing Form 8832 & 2553), an LLC is not a corporation. For instance, the formation state may not recognize the LLC as anything more than an LLC and may still require LLC filings, even if the LLC is being recognized as a Corporation (S Corp. or C Corp.) by the IRS. To change your entity’s structure from an LLC to a corporation requires the LLC to actually convert to a Corporation with the formation state’s agency that handles corporate filings.
Convert from LLC to INC and elect to be an S Corp
With this option your LLC is formally converting its entity type from an LLC to a Corporation with the formation state. That is, the structure of the LLC is actually changing formally to a Corporation, then if it so elects, it can also request to be an S Corp. for tax purposes.
If a formation state actually allows for the formal conversion, this can be a simple process, usually costing about the same, or a little more than forming a brand new entity. Usually it is a matter of filing some sort of Articles of Conversion, which may act as Articles of Incorporation (or sometimes it is two documents).
If the formation state does not allow for a simple conversion process for converting an LLC to a Corporation, the entity can do the following instead:
1. File with the state
a. A new corporation with the same name &
b. Simultaneously cancel your LLC
2. Send a letter to the IRS telling them of the change in structure
3. Elect to be an S Corp (by filing an S Election Form 2553). Please Note: Be sure to read further on What is an S Corporation? because there are timing issues when it comes to making an S election.
Essentially, by using this method, you are still changing your entity’s structure, but using the only means available by your formation state to do so.
States who offer a conversion process
CA, DE, FL, MD, NV, WY
States who do not offer a conversion process
AL, AZ, CO, CT, NJ, NY,PA
Although I have made the process look somewhat easy, there are somewhat complex tax issues on the federal, as well as state level that you must first consider. So, regardless of what option you take, be sure to consult your tax advisor to make sure this action will not adversely affect your business or personal taxes.
02 Convert from LLC to INC and elect to be an S Corp
Luckily not everything in your articles of incorporation/organization need to be amended to be changed. Below is a list of items in your articles that can typically be changed without an amendment filing:
* Registered Agent Name & Address
* Member/Managers Names & Addresses (for LLCs)
* Directors Names & Addresses (for INCs)
* Company Address (Physical or Mailing)