How To Convert S Corp To LLC: 3 Ways For Your Consideration

Are you a business owner considering converting your S Corporation to an LLC? Many entities are making the switch because of the advantages that come with it. This includes flexibility in management and taxation as well as other potential financial benefits.

Yet, making the switch may also come with certain disadvantages. In what follows, you will be well-equipped with how to prepare for the S Corp to LLC conversion to make an informed decision for your business. Keep reading for more!

Why convert an S Corp to LLC?

Changing an S Corp to an LLC offers a variety of benefits that could be great for your business. An LLC provides more flexibility in terms of management and taxation, allowing you to customize the organization’s structure to best fit your business’s needs.

Tax advantages

One of the main motivations for converting an S Corp to an LLC is the flexibility in taxation.

LLCs can choose how they are taxed as a disregarded entity, partnership, or even as an S Corp, giving business owners greater control over how profits and losses are reported. This adaptability can help minimize overall tax burdens, especially for multi-member LLCs operating in states with favorable tax treatments.

Additionally, LLCs generally face fewer restrictions on allowable deductions and ownership structures, while S Corps are limited to 100 shareholders and must comply with strict eligibility rules under IRS guidelines.

Better profit and loss distribution

LLCs offer customizable profit and loss allocation, allowing members to decide how income is distributed regardless of ownership percentage, a flexibility not available in S Corporations.

In contrast, S Corps must distribute profits strictly in proportion to each shareholder’s ownership stake, even if one shareholder contributes more actively to the business.

This difference makes LLCs particularly appealing for partnerships and professional firms where contributions vary across members.

Enhanced management flexibility

Unlike S Corps, which are required to maintain a formal corporate structure with directors, officers, and annual meeting minutes, LLCs are managed more informally and can be structured in multiple ways, either member-managed or manager-managed.

This allows for faster decision-making, fewer compliance obligations, and easier adaptation to changing business needs.

Furthermore, LLCs impose fewer ownership restrictions, making it simpler to admit new members, issue profits interests, or attract investment without altering the entity’s core status.

Differences between S Corp vs. LLC in short

Before deciding to change S Corp to LLC, it’s important to understand how the two structures differ in key aspects such as ownership, taxation, and compliance.

While both offer limited liability protection and pass-through taxation, their operational frameworks vary significantly.

An S Corporation (S Corp) is often preferred by smaller, closely held businesses that value structured governance and predictable taxation. In contrast, a Limited Liability Company (LLC) appeals to business owners seeking greater flexibility in management, membership, and profit allocation  especially when scaling or diversifying investments.

By recognizing the distinctions between these two entities, you can make a more informed decision that aligns with your company’s goals, risk appetite, and long-term growth strategy.

To give you a clearer picture, here’s a quick comparison between an S Corp and an LLC summarizing their key differences.

Aspect	S Corporation (S Corp)	Limited Liability Company (LLC)
Entity Type	Taxation status under the IRS	Legal entity recognized by state law
Taxation	Pass-through taxation	Pass-through taxation
Federal Taxes	No federal taxes (income passes to shareholders)	No federal taxes (income passes to members)
Ownership Limits	Up to 100 shareholders; U.S. citizens or residents only	No ownership limit; open to individuals, companies, or foreign members
Paperwork Requirements	Extensive filing and recordkeeping obligations	Minimal paperwork and simpler maintenance
Liability Protection	Limited liability	Limited liability
Equity Structure	One class of stock	No stock structure

For a deeper dive into how each business type works, you can read our comprehensive guide on the key differences between S Corp and LLC.

Conversion of S Corporation to LLC tax consequences

When transitioning from an S Corporation to an LLC, the process can introduce several tax considerations that business owners should evaluate carefully.

Although both entities share a pass-through taxation model, the method of conversion, whether by merger, reorganization, or statutory filing can lead to very different tax outcomes under IRS rules.

Understanding these implications early allows you to plan strategically, maintain compliance, and minimize potential tax exposure during the conversion process.

Flexible taxation

One of the key advantages of forming an LLC is the flexibility to choose how the entity is taxed.

By default, a single-member LLC is treated as a disregarded entity, while multi-member LLCs are taxed as partnerships. However, the LLC can elect to be taxed as an S Corporation or even a C Corporation by filing the appropriate IRS forms (Form 8832 or 2553).

This flexibility allows business owners to select the most tax-efficient structure for their specific situation, something an S Corporation cannot easily change once elected.

Capital gains tax advantage

When converting an S Corporation to an LLC, the IRS may treat the process as if the S Corp sold its assets at fair market value before transferring them to the LLC.

This could potentially trigger capital gains tax if the company’s assets have appreciated in value.

However, in certain states or under specific restructuring methods (such as statutory conversion), the transaction may not be recognized as a taxable event. Consulting a tax professional is essential to determine whether the conversion will generate a capital gain liability.

Single-member LLC complexity

After conversion, if the new LLC is owned by a single individual or entity, it becomes a single-member LLC, which is disregarded for federal income tax purposes.

This means that all profits and losses are reported directly on the owner’s personal tax return (Form 1040, Schedule C).

While this simplifies reporting, it also removes the “corporate veil” of separate taxation, which could complicate accounting for businesses that previously operated under the more formal S Corporation structure.

No capital gains tax 

In some cases, particularly when the conversion is executed as a statutory merger or statutory conversion, the IRS may not treat the change as a taxable event meaning no capital gains tax is incurred.

The key requirement is that the ownership structure and value of interests remain consistent before and after conversion.

This makes statutory conversion a preferred option for many business owners seeking to restructure while maintaining tax neutrality.

Factors before deciding S Corp to LLC conversion

When considering the conversion, it is essential to understand relevant factors – such as:

• Whether to convert S Corp to single-member LLC or multi-member LLC
• What the flexibility when it comes to managing your business structure is like
• Whether the conversion to LLC will be more costly compared to managing the S Corp
• Additional paperwork, state requirements when coming to filing taxes for an LLC versus an S Corp
• Converting S Corp to LLC tax consequences, depending on the state in which your business operates
• The method for converting your business from S Corp to LLC affects your legal and financial obligations.

Because the case of each corporation is different based on your business’s needs and objectives, it is a good idea to consult a professional who can help you weigh the pros and cons of such a conversion, along with how to make the switch properly.

Step-by-step guide for S Corporation conversion to LLC

The S Corp to LLC conversion process can be relatively straightforward if done correctly. The procedure required for conversion may vary from state to state, all business owners had better consult the legal team for the most up-to-date information.

So what steps need to be taken in order to make the transition successful?

C Corporations With S Corp Status

An S Corporation originates from a C Corporation that has elected to be taxed under Subchapter S of the Internal Revenue Code.

This election allows it to retain corporate liability protection while being treated as a pass-through entity for tax purposes.

When such an S Corporation converts to an LLC, it must address both corporate and shareholder-level implications, as certain assets and retained earnings from its C Corporation phase may still be subject to capital gains or built-in gains tax.

Method 1: Filing the Certificate of Conversion (Statutory conversion)

Statutory conversions allow an S Corp to convert directly into an LLC without dissolving the original entity. This method is often referred to as a “domestic conversion” and can be completed in fewer steps than other methods.

To carry out a statutory conversion, you must:

• Obtain unanimous approval from all shareholders.
• Draft a corporate resolution or a plan of conversion outlining how ownership and governance will change.
• File the approved plan together with a Certificate of Conversion (or a similar form) to the Secretary of State.

This method is widely preferred because it minimizes administrative steps and avoids the need to reassign business assets.

Here is the Delaware Certificate of Conversion from Corporation to LLC for your reference.

Method 2: Merging S Corp into a new LLC (Statutory merger)

A statutory merger is a type of business transaction that involves two separate entities merging into a single entity. In this case, the S Corp would merge into the LLC and dissolve itself in the process. This method requires filing paperwork with the state in which the entities are registered.

To complete this process, you must:

• Establish a new LLC under state law.
• Prepare a Plan of Merger that sets out how assets, debts, and equity will move from the S Corp to the LLC.
• File a Certificate of Merger and any other documents required by your state with the Secretary of State.

While this method requires more paperwork than a statutory conversion, it is suitable for companies operating in multiple states or managing multiple subsidiaries under one umbrella structure.

Method 3: Non-statutory conversion

Non-statutory conversions involve transferring assets from an S Corp to an LLC before dissolving the S Corporation. This is a more complicated process that requires filing paperwork with the state in which both companies are registered, along with any necessary tax forms.

The process generally includes:

• Notifying the IRS of the S Corporation’s dissolution and liquidation.
• Informing all creditors, clients, shareholders, and employees of the structural change.
• Filing a Certificate of Dissolution for the S Corporation with the Secretary of State.
• Creating a new LLC under state law.
• Transferring all assets, debts, and ownership interests to the new LLC.

Because it essentially repeats both the formation and dissolution processes, this method takes more time and legal coordination. However, it offers flexibility for complex restructuring or when state law doesn’t recognize direct conversions.

LLCs Taxed as an S Corp

After changing from an S Corporation to an LLC, business owners can choose to keep the tax advantages of an S Corporation by electing for their LLC to be taxed under the same status.

This structure allows businesses to maintain the pass-through taxation benefits while gaining the operational flexibility of an LLC.

To achieve this, specific steps must be followed to remain compliant with IRS regulations and ensure the election is recognized properly.

Step 1: File a Revocation of S Corporation Status

The first step is to formally revoke your previous S Corporation election with the IRS.
This is done by submitting a Revocation of S Corporation Status letter signed by shareholders owning more than 50% of the company’s shares.

Your letter should include:

• The corporation’s legal name and Employer Identification Number (EIN)
• A statement of revocation, clearly declaring the intent to terminate the S Corporation election
• The effective date of revocation

Once processed, the IRS will confirm that your business is no longer taxed as an S Corporation.

Step 2: File an Entity Classification Election

After the revocation is accepted, your next step is to choose how your new LLC will be Once the revocation of your S Corporation status is complete, the next step is to reclassify how your new LLC will be taxed.

To do this, you must file IRS Form 8832, also known as the Entity Classification Election.

This form lets the IRS know how your LLC should be treated for federal tax purposes, whether as a disregarded entity, partnership, or corporation.
Generally, you should file Form 8832 at the same address where you normally send your business tax returns.

While Form 8832 has no fixed deadline, there are specific timing restrictions:

• It cannot be filed earlier than 75 days before the desired effective date of election.
• It cannot be filed later than 12 months after the intended election date.

Filing this form correctly ensures your LLC’s new tax classification takes effect on your preferred date and remains in good standing with the IRS.

Step 3: Evaluate Future Tax Implications

Before finalizing the election, it’s essential to evaluate the long-term tax impact of having your LLC taxed as an S Corporation.

This setup can help reduce self-employment taxes, as owners may receive a reasonable salary while classifying remaining profits as distributions.

However, this election also increases administrative duties. You’ll need to:

• Run regular payroll and withhold employment taxes
• Maintain accurate and separate accounting records
• File annual IRS and state compliance documents

Consulting a qualified CPA or tax professional ensures that the S Corporation election aligns with your financial goals and remains compliant at both federal and state levels.

Conclusion

No matter what type of business you have, it is important to understand all the different options available and their respective benefits and drawbacks in order to make the best decision for your company. Be sure to take your time and research thoroughly before starting the conversion process so that you can ensure a smooth transition.

If you need more help deciding between an S Corporation and an LLC, consider seeking practical advice from a professional team.

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