Can I Change My S Corp to a LLC?

Small organizations frequently think about modifying their organizational structure as they expand to better meet their demands. Changing from a S corporation to a limited liability company (LLC) is one example of such a shift. Conversion is the process of implementing this change, and it is typically a simple one. However, before making this modification, there are a few things to take into account.

It is crucial to comprehend that a S corporation can become an LLC first and foremost. The conversion procedure include submitting papers to the state where the company is registered and revising the operating agreement as appropriate. To avoid any legal repercussions, this process must be conducted properly as it is a legal one.

Tax-free conversion of a S corporation into an LLC is a possibility. This is so that LLCs and S corporations can both be treated by the IRS as pass-through businesses. It is crucial to keep in mind, though, that the conversion process can result in some tax responsibilities, such as the recognition of built-in gains or the recapture of certain tax credits. The procedure is similar if you want to switch from a S corporation to a single-member LLC. A single-member LLC, it should be noted, is not treated as a separate business for taxation reasons. Due to the LLC’s income being taxed as personal income, the tax rate may increase.

An S corporation’s stringent eligibility requirements are one of its drawbacks. A company must have no more than 100 shareholders who are all US citizens or residents in order to be eligible to become a S corporation. The company must also have just one class of equity. It might be required to convert to an LLC if a company can no longer satisfy these conditions.

Finally, you will require a new Employer Identification Number (EIN) if you choose to change from a corporation to an LLC. This is so because the IRS views an LLC as a new entity. A new EIN can be obtained by submitting Form SS-4 to the IRS.

Conclusion: While switching from a S corporation to an LLC is technically possible, it’s necessary to take the associated tax consequences, eligibility requirements, and legal process into account. Before deciding to alter the organizational structure of your company, it is advised that you speak with a legal or financial expert.