How to Convert LLC into S Corporation? And Documents required for Conversion of LLC to S Corporation

By submitting Form 2553 with the Internal Revenue Service (IRS), you can convert your Limited Liability Company (LLC) to an S corporation (S corp). In this article, there is detailed information on Conversion of S Corporation to LLC, How to Convert LLC into S Corporation, and Documents required for Conversion of LLC to S Corporation is mentioned.

Limited Liability Company (LLC)

A Limited Liability Company (LLC) is a type of business in which the owners are referred to as members. The corporate entity is distinct from the members, therefore if the company is sued or fails to pay its debts, only the entity can be held culpable. A Limited Liability Company (LLC) combines the characteristics of a Sole Proprietorship, a Partnership, and a Corporation.

Features of an LLC

1. Flexibility between the Tax Structure: A LLC can choose to adopt the tax structure applicable on Sole Proprietorships, Partnerships, S Corporations, or C Corporations.

2. Limited Liability: Limited Liability Company is a separate legal entity where the liability of its members is limited to the shares held by them. The members and shareholders of the company are protected from being held personally liable for the debts of the company.

3. Avoidance of Double Taxation: In an LLC, the income is taxed only at a personal level, rather than at the corporate level. Therefore the members of the company are protected from being taxed at the time of receiving dividends from the company.

4. Flexibility in Management Structure:   LLC enjoys higher flexibility to decide the management structure for the company. They have the liberty to decide whether they want to manage the LLC by themselves or they can appoint the managers to do it for them.

5. Pass-through Federal Taxation on Profits: An LLC has the option to pass-through federal taxation i.e. they can directly tax their profits in the hands of their members without being taxed on the company level. Instead, members pay tax on the profits on their own federal income tax returns.

S Corporation

Small Business Corporations (referred to as S Corporations) are ordinary business corporations that elect under Section1362(a) to pass corporate income, credits, deductions, and losses to their shareholders for Federal Tax purposes.

A corporation is “eligible” to be an S. Corporate if,

• The number of shareholders in the corporation is less than or equal to 100.

• Whose shareholders or the board of directors must be resident individuals only.

• Eligible for an entity that can issue only one class of securities.

Features of S Corporation

• Limited Liability of the Members – The liability of the members is limited only to the shares held by them and their assets can be attached for discharging the liability of the corporation.

• Avoidance of Double Taxation – The S. corporation need not pay federal taxes at the corporate level. The income or losses are disbursed to the shareholders who will pay their income tax returns.

• Perpetual Existence – S Corp has perpetual existence. The life of S Corporation is not affected by any owner’s death or dismissal.

• The number of Members – S corps may not have more than 100 stockholders. To be eligible for ownership, one must be an individual holding a US passport or be an American resident. Artificial entities such as trusts and other corporations are not entitled to become the owner of the company.

LLC Vs S Corporation

• An LLC is a type of business entity, while an S Corporation is a tax classification. To become an S Corporation, it must meet specific guidelines as mentioned by the Internal Revenue Service (IRS).

• An S corp. must be owned by US citizens and cannot have more than 100 owners.  Whereas in LLC there can be an unlimited number of owners with no restrictions on classification or nationality.  

• An S Corporation has a board of directors who are responsible for making high-level decisions regarding running the business. Whereas LLC has an option to manage through their owner or can appoint officers for management of the company.

• An S corp. can only issue common stock, which gives voting rights to shareholders. Whereas an LLC does not have shareholders and must pay members according to the LLC’s articles of organization.

Conversion of LLC to S Corporation

To change from LLC to S Corporation, you need to follow the following steps

Step 1: Check on the Eligibility to Convert into S Corporation

1. There are no more than 100 shareholders and they should be resident aliens or US citizens.

2. The business has only one class of stock.

3. Each shareholder consents to the election.

Step 2: Complete and File Form 2553 Access the form 2553 given on the IRS website and provide relevant information in the form. The time limit for filing the 2553 form is not more than two months and 15 days after the beginning of the tax year that you want the S corp election to be in place or at any time in the year before the tax year that you’d like the S corp election to be in place.

How to Fill Form 2553?

Part I: Part one of Form 2553 includes your business’s name and address, incorporation date, and tax year.

This part is divided into two sections: 

Section I should only be filed by the late filers. For information on relief for late filers, review the “general” section of the IRS instructions to Form 2553.

Section II is The final section that includes the names, addresses, and signatures of all the shareholders.

Part II: You’ll only need to fill Part II if

1. A new corporation adopts the tax year entered in item F, Part I.

2. An existing corporation retains the tax year entered in item F, Part I.

3. An existing corporation changes to the tax year entered in item F, Part I.

Part III: Part III is only for the sub-chapter S who are eligible to be qualified trusts.

Part IV: Part IV is rarely used. It is only completed if “a late entity classification election was intended to be effective on the same date that the S corp election was intended to be effective.

Conclusion

In some cases, if the Form is Filled late, a company can benefit from S Corporation Taxation. It is worth examining if a Multi-Member or Single-Mmeber LLC to S Corp. Conversion will save you money, where you are starting a new LLC or have been in a Company for a While.