6 Key Steps to Converting an LLC to a Sub S-Corp

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Posted on: 29th Jun 2014

Why would anyone convert an LLC to a Sub S-Corp? To begin with, a Sub S-Corp, also called the Subchapter S-Corporation, refers to a company that operates as a non-corporate entity, but enjoys the benefits of a corporation. The most important advantage to forming an LLC is that it provides you, the owner, with personal liability protection after a court-ordered compensatory judgment. Unfortunately, it does not provide corporate tax advantages. However, you can elect to be taxed under Subchapter S under the Internal Revenue Code. This would allow you to enjoy the tax benefits of a corporation, and simultaneously, preserve the personal liability protection of your LLC. To do this, you will need to carry out legal procedures for a safe and successful conversion. This is a short list of the procedures that you must follow.

Consult a Tax Specialist
All corporate tax matters must be treated seriously and under the direct guidance of an experienced tax professional. This is especially the case when deciding to convert an LLC to a Sub S-Corp. You can consult either a corporate tax attorney or a certified public accountant specializing in corporate taxation. Either way, make sure to work with a tax expert with knowledge of business tax law.

Observe Your State�s Formality Requirements
Converting your LLC to a Sub S-Corp will mean that the formality requirements of your state resulting from the conversion will also change. Therefore, you will need to observe the Sub S-Corp formality requirements for your state. Your new Sub S-Corp will be subject to ongoing formalities such as holding and properly documenting annual meetings of directors and shareholders.

Check Your State�s Eligibility Requirements
Typically there are state eligibility requirements that will determine if an owner or member qualifies to convert an LLC to a Sub S-Corp, and have it treated as an S-Corp. A major requirement is that it must be a domestic corporation with no more than 100 shareholders. Following this, the shareholders must be either US citizens or valid U.S. residents, and hold only one class of stock. Consult with your tax specialist to see if your LLC qualifies under your state�s eligibility requirements.

Change the LLC Classification
To convert an LLC to a Sub S-Corp, you must change your LLC classification. This is easily done by filing the 8832 form of the Internal Revenue Code. However, If you do not wish to change your LLC's classification, the 2553 form is all that will be required. You can access them on the IRS website.

Conduct a Subchapter S Tax Election
So far, you�ve learned that your LLC meets all of requirements to be converted to a Sub
S-Corp, and treated as an S-Corp. Now, you must get your shareholders to agree to elect for it to be taxed under Subchapter S-Corp status. The election must be filed with the IRS on or before the 15th day of the third month of the taxable year. For example, if you formed your Sub S-Corp on March 20, you must file the election by May 15. The election must be signed by all of your shareholders, and filed under the 2553 form of the Internal Revenue Code.

File the Tax Returns for Your New Sub S-Corp
Now, you�re all set. All that is left is to do annual tax filing for your new Sub S-Corp status. The list below provides the forms to be filed by the shareholders. This is only a partial list, and you may not even need some of them.

Form 1120S: Income Tax Return for S Corporation
1120S K-1: Shareholder's Share of Income, Credit, Deductions
Form 4625 Depreciation
Employment Tax Forms
Form 1040: Individual Income Tax Return
Schedule E: Supplemental Income and Loss
Schedule SE: Self-Employment Tax
Form 1040-ES: Estimated Tax for Individuals

The financial year of an S-Corp ends on December 31. The filing deadline is March 15 of the new tax year.

Conclusion
These are the known guidelines for changing your LLC so that it can receive the benefits of an S-Corp. It is important to note that the author of this post is neither an attorney, nor a tax expert. Therefore, it is highly recommended that you first consult an experienced tax professional before taking any steps to convert an LLC to Sub S-Corp. Good luck!

Notes
(l) In some situations, it may be recommended that you sell your LLC to your new S-corporation instead of taking the conversion route. This will be determined by the taxes that may be assessed by the IRS and your state. Your small business attorney can advise you of the pros and cons of this action.

(ll) Rules for converting your LLC will vary from state to state. Also, even though you can quickly get a new EIN on the IRS website, it will take about two weeks for your new number to become a permanent part of their system.

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6 Key Steps to Converting an LLC to a Sub S-Corp

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