How to Convert an LLC to S-Corp

By Michael Marz
Businessman signing document

ColorBlind Images/Blend Images/Getty Images

From the moment you officially form a limited liability company, or LLC, the business automatically is taxed as a partnership, or as a sole proprietorship if you're the only LLC member. An LLC, however, can choose to be taxed as an S corporation instead if the proper election is made with the Internal Revenue Service. Since an S corp is solely a tax designation, making this election doesn't change the business' legal status as an LLC.

Potential Tax Savings of S Corp Election

One of the main advantages of electing to have your LLC taxed as an S corp is a reduction in the employment taxes -- for Social Security and Medicare -- you'll owe on profits. Members of an LLC that isn't taxed as an S corp must pay employment taxes on all business profits, which as of April 2015, means handing over 15.3 percent of profits to the IRS before you even pay income tax. If your LLC is taxed as an S corp, however, you'll only owe employment taxes on the wages the LLC pays you for the services you provide as an employee -- not on your entire share of LLC profits.

Only Certain LLCs Can Convert

In order to convert your LLC's tax designation to an S corp, an election must be made with the IRS by filing Form 2553. To make the election, however, your LLC must meet certain eligibility criteria. Limited liability companies satisfy the first criteria of being a domestic business entity that's eligible to be taxed as a corporation. Additionally, the LLC cannot have more than 100 members, and every member must be an individual -- excluding nonresident aliens -- an estate, a tax-exempt organization or a certain type of trust. In other words, if a corporation or other LLC holds a membership interest, the LLC isn't eligible to file Form 2553. Except for differences in voting rights and ownership percentages, all membership interest must confer identical profit distribution and liquidation rights. Lastly, all LLC members must agree to make the S-corp election.

When to File Form 2553

You can file Form 2553 as early as the first day of the tax year immediately preceding the first year you want the LLC to be taxed as an S corp, or as late as two months and 15 days into the tax year. To illustrate, suppose you want to convert the LLC to an S corp as of Jan. 1, 2016. In order for the S-corp election to be valid for the entire 2016 tax year, Form 2553 must be filed between Jan. 1, 2015 and March 15, 2016.

LLC Tax Filings after S Corp Conversion

Once the S corp election is made, you'll start filing the LLC's annual information returns on Form 1120S. Like a partnership, the S corp doesn't pay tax. Instead, business income and losses are passed through to LLC members. This means, however, that you'll report your share of the LLC's profits and losses on a Schedule E attachment to your personal return and are responsible for paying the income tax on that amount.

About the Author

Michael Marz has worked in the financial sector since 2002, specializing in wealth and estate planning. After spending six years working for a large investment bank and an accounting firm, Marz is now self-employed as a consultant, focusing on complex estate and gift tax compliance and planning.