By Has your company started getting more investment, more profits or more employees? If the answer is “yes”, it is high time to change your LLC business to S Corp. It might bring you a lot of additional taxation benefits.
Do you know how to change from LLC to S Corp? This decision might be a complicated one. If you are ready to reconsider your growing business structure, you’re at the right place.
This article is everything you will need while transforming from LLC to S Corp. Stick with me and learn the procedure, advantages and disadvantages.
If you are an LLC business owner and your business is expanding, it is high time to know what an S corporation is. If interested, you can change your business structure from LLC to S Corp.
Take steps to learn about the transformation procedure from LLC to S cop.
Here is step-by-step direction on how to convert an LLC to an S-Corporation:
- Start with checking the eligibility of your business. The IRS has specific guidelines for this structural change of companies. One of the major prerequisites is; “your business should have less than 100 shareholders”.
- Now, check for the government’s permission for conversion in your area. If allowed, complete corporation conversion and all other requirements, such as issuing a stick and electing a board of directors.
- Once your business has met all the eligibility criteria, you should fill out IRS form 2253. It is an election organized by a small business corporation. This particular form will serve further tax purposes, too.
Here, you might have to fill out other forms like “name,” Employer Identification Number (EIN),” Contact details, and information on all shareholders. - Now, submit the file on time by completing the listed instructions on the form. Generally, the form submission deadline is around two months or 15 days.
- Update Legal Documents: It is time to update and revise your legal documents. Make sure LLC’s legal documents are aligned with S corp status.
IRS Requirement Of Transformation: LLC To S Corp
IRS (Internal Revenue Service) will work on outlining tax obligations. Before you decide on LLC to S corp transformation, check if your business is eligible for this regarding IRS or not:
Domestic Corporation
The first requirement is that the business must be a domestic corporation. It cannot be formed or registered in any other country if the domestic country is the USA.
Allowable Shareholders
S corporations are limited in the type of shareholders they can have. The eligible shareholders include individuals, certain types of trusts, and estates. Partnerships, corporations, and non-resident aliens cannot be shareholders in an S corporation.
Limit on Number of Shareholders
The S corporation structure limits the number of shareholders it can have, at most 100. Families and married couples are considered as one shareholder here.
Single Class of Stock
The S corporation must have only one class of stock issued. This means that all shareholders must have the same rights and privileges regarding dividends and voting rights.
Ineligible Corporation
Certain types of corporations are ineligible to form an S corporation. These include insurance companies, sales companies, and certain financial institutions.
What Are The Business Benefits Of Changing LLC To S Corp?
LLC converting to S corp might bring on a lot of business benefits. Among all, the biggest facility is that it lowers self-employment tax for members.
Owner-employees will receive a reasonable salary and be subject to employment taxes. The rest of the profits will be taxed as income on the members’ personal tax returns.
Changing to an S Corp structure can make it easier to raise capital. S Corps can issue stock to investors, making it more attractive for venture capitalists or angel investors to invest in the company.
Also, this transformation can bring a more formalized structure to your business. Corporate governance formation here can provide a more efficient decision-making procedure.
Challenges And Risks Of Converting To S Corp Status
Although there are a bunch of benefits to converting LLC to S corp, you can’t really sit down on its challenges.
You must know both sides as you will be making a big decision here.
- If you compare LLC with S corp, S corps has more rules and regulations to follow. Being an S corp, you might have to follow some rules regarding voting rights and shareholder meetings.
- As a business owner, you should keep your ideas and interests secret. There is a high risk that shareholders might sell your ideas by outvoting you.
- There are certainly a few pieces of paperwork that will need you to pay compliance requirements and costs.
When Is the Right Time to Convert an LLC to an S Corp?
Changing your business structure depends mostly on your business growth. However, there are some other factors to check.
Give a quick check on these few factors and know if it is the right time to switch your business structure or not:
- Significant expansion of the business
- Changes in ownership or managerial structure
- Strategic tax implications
- Desire to boost credibility and reputation
- Rise in profits
Should I Stick To LLC Or Change It To S Corp?
Deciding whether to stick with an LLC structure or convert it to an S Corporation (S Corp) depends on several factors.
It will depend upon the taxation process you would like to choose, ownership arrangements, business growth and strategy, as well as legal liabilities.
If all these make a clear sign of structure transformation, go for S corp. Rather than that, LLC and S corp are beneficial equally in their own ways.
Frequently Asked Questions
The cost of converting your business structure from LLC to S corp will vary from state to state. In Virginia, you need to pay a minimum of $25 bucks. At the same time, California might take it for around $150.
No, taxes for LLCs and S corporations are not the same. LLCs have more flexibility in their tax structure. They can also be taxed as a sole proprietorship, partnership, or corporation. On the other hand, S corps are a specific type of corporation that has elected a special tax status with the IRS.
Nonresident aliens are prohibited from being shareholders in an S corp, according to the United States Code. If aliens do not hold green cards, they will not get to convert the business structure from LLC to S Corp.
