How To Switch From LLC To S Corporation?
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Convert LLC to S Corporation may save you money on taxes. According to state law, an LLC is created for federal tax purposes. You can treat it as a corporation, partnership, or sole proprietorship.
A business owner should decide whether an LLC or S corp is best for their company. When it comes to income tax purposes and managing a business, choosing the right type of business structure is important.
By filing Form 2553 with the Internal Revenue Service, you can convert your limited liability business (LLC) to a S corporation (S corp) (IRS).
Learn how and why to adopt the S corp tax designation for your LLC in our Convert LLC to S Corp guide.
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How to Convert an LLC to S Corp
The LLC can simply elect to be taxed as an S-Corporation for federal tax purposes. You simply need to fill out a Form and send it to the IRS. As soon as the LLC has been classified for federal tax purposes as a Corporation, it can file Form 2553 to be taxed as an S-Corporation.
A company must convert to an S-Corp by March 15 in order to be eligible for the following year, or within 75 days of opening an LLC to be eligible for the year, it is opened.
In the event that you miss this deadline, you may apply for late election relief if you have a valid reason.
It’s important to remember, however, that you’re not changing the entity type, just the federal tax classification. The IRS classifies the LLC as an S-Corp, but it is still an LLC and may be taxed as one by the state where it was formed.
To change the actual entity structure, you must change the LLC into a Corporation with the formation state. While some states provide a formal conversion process, others require a workaround.
What is the best time to convert your LLC to an S-Corp?
It is believed that if a company can pay its owners “fair wages” and at least $10,000 in dividends every tax year, then a multi-member LLC should choose the S corp classification.
Select a S corporation. If the following conditions are met:
- You’re a professional company owner who knows how much money you make each year.
- You’re already dealing with the responsibilities that come with S Corp status, such as bookkeeping and payroll.
- Even after paying the “reasonable salary,” your company earns enough to benefit from S corp classification and save money.
Select Default Tax Status if:
- You’re a new entrepreneur with no idea how much money you’ll make each year.
- You don’t want to bother with formalities like bookkeeping and payroll.
- Your company does not generate enough revenue to benefit from S corp classification.
Why you should consider switching from LLC to S-Corp?
The self-employment tax rises in direct proportion to your LLC’s earnings. You make more money and pay more taxes, but your capacity to contribute to retirement funds remains same. This is when changing the LLC to an S-Corp comes into play.
Savings on self-employment taxes
Saving on self-employment tax is one of the most significant and well-known advantages of an S-Corporation versus an LLC. The income from an LLC is passed on to the owner, who must pay 15.3 percent self-employment tax. If the owner lives in another country, the Foreign Earned Income Exclusion can reduce income tax but not self-employment tax.
In contrast, the owner of an S-Corporation can accept a salary from the earnings and use the Foreign Earned Income Exclusion to reduce income tax.
Can I Change My Business From LLC to S Corp?
LLCs cannot elect S corp. taxation unless they meet IRS requirements for S corporation ownership and organization. In addition, an S corporation must have:
- Corporations, non-resident aliens, and partnerships cannot be shareholders
- Corporations must be domestic
- No more than 100 shareholders
- There is only one class of stock
If an LLC does not meet these requirements, it cannot convert from LLC to S corp.
LLC vs S Corp
LLCs are formed for federal tax purposes under state law. LLC members are subject to self-employment taxes. It may be treated as a corporation, a partnership, or a sole proprietorship. In comparison to types of corporations, the LLC has more advantages due to its flexibility.
A corporation is not the same as a business entity. This is an elected tax status. An S corporation is taxed based on profits. Shareholders receive dividends from leftovers, which are taxed at a lower rate than regular income. It is therefore personal to convert an LLC or S corporation.
Is an S-Corporation the best option for you?
Contact us for a consultation to determine if you should convert your LLC to an S-Corporation. We can also help you with IRS paperwork and company tax returns.
FAQs:
An S corporation (S corp) is a tax designation that can be assigned to either an LLC or a corporation.
By creating a corporation and applying to the IRS for S corp status.
By forming an LLC and requesting S corp tax status from the IRS when requesting your EIN.
- Be a citizen of the United States
- Have only allowable shareholders, which can be individuals, certain trusts, and estates but cannot be partnerships, corporations, or non-resident alien shareholders.
- Have no more than 100 shareholders.
- Have only one type of stock.
- It must not be an ineligible corporation (i.e. certain financial institutions, insurance companies, and domestic international sales corporations, which are forbidden the S corp structure)
S corporations benefit from the fact that business income, as well as various tax deductions, credits, and losses, are passed through to the owners rather than being taxed at the corporate level.
No, the default taxes for an LLC and the default taxes for a S corporation are not the same.
Owners of a S corporation pay personal income tax and self-employment tax based on a fixed salary.
They can then remove any remaining earnings from the company as a “distribution,” which is exempt from self-employment tax.
All business earnings are passed through to the owners’ personal tax returns with an LLC, and the owners must pay personal income tax and self-employment tax on the whole amount.
The term “pass-through taxation” refers to the fact that a pass-through business pays no taxes.
Instead, a control person pays the business’s taxes on his or her own personal tax return.
