“I thought I had to dissolve my LLC and form a new corporation. I was wrong.”
An LLC can elect S-Corp tax treatment without changing anything with the state. You keep your LLC. You just change how the IRS taxes it.
This is the most common path to S-Corp status for small businesses. You get the legal simplicity of an LLC combined with the tax advantages of S-Corp treatment.
This guide walks through exactly how to do it.
Key Takeaways
- LLCs can elect S-Corp taxation without changing legal structure (file Form 2553)
- Filing deadline: 2 months 15 days after start of tax year (March 15 for calendar year)
- Late election relief available under Rev Proc 2013-30 if requirements met
- After election: LLC files Form 1120-S instead of Schedule C or Form 1065
- Owner must be on payroll with W-2 starting from election effective date
- Tax consequences: Generally none if done properly and timely
- When it makes sense: Profits exceed ~$40,000-50,000 after reasonable salary
- Consider costs: Payroll setup + ongoing costs + 1120-S preparation (~$2,000-4,500/year)
Table of Contents
Can You Convert LLC to S-Corp?
Yes, but “convert” is slightly misleading. Let’s clarify what actually happens.
Two Paths to S-Corp Status
Option 1: Change Tax Election Only (Most Common)
- File Form 2553 with the IRS
- LLC stays an LLC with the state
- IRS treats you as S-Corp for tax purposes only
- Best of both worlds: LLC flexibility + S-Corp tax treatment
This is what most small businesses do.
Option 2: Actually Form a New Corporation
- Dissolve the LLC
- Form a new corporation with the state
- Elect S-Corp status for the corporation
- More complex, more expensive, rarely necessary
Only choose this path if you have specific reasons requiring corporate structure (VC investment, planning for IPO, etc.).
Why Most Choose Option 1
Filing Form 2553 to elect S-Corp taxation keeps everything simple:
- No state filing required for the election itself
- No new EIN needed (usually)
- Operating agreement stays in place
- Contracts, bank accounts unchanged
- It’s just a tax election
Your state sees you as an LLC. The IRS sees you as an S-Corp. Both work simultaneously.
Requirements to Elect S-Corp
Your LLC must meet these criteria:
| Requirement | Details |
|---|---|
| Domestic entity | Must be US-based |
| 100 or fewer members | All family members count as one |
| Eligible members only | Individuals, certain trusts, estates |
| No foreign members | Cannot have non-US citizens or residents |
| One class of ownership | Can’t have preferred/common classes |
| Eligible business | Not an insurance company or certain banks |
If you fail any requirement, you can’t elect S-Corp status.
LLC vs S-Corp Complete Comparison
Why Convert LLC to S-Corp?
Understanding the benefits helps you decide if conversion makes sense.
Self-Employment Tax Savings
This is the primary motivation for most conversions.
LLC (default): All profit subject to self-employment tax (15.3%)
S-Corp: Only salary subject to payroll taxes. Distributions above salary? No SE tax.
Example Savings:
| Annual Profit | LLC SE Tax | S-Corp Payroll Tax* | Annual Savings |
|---|---|---|---|
| $75,000 | $10,597 | $6,120 | $4,477 |
| $100,000 | $14,130 | $7,650 | $6,480 |
| $150,000 | $21,068 | $11,475 | $9,593 |
*Assumes 50% salary, 50% distribution
QBI Deduction Optimization
Both LLCs and S-Corps qualify for the 20% Qualified Business Income deduction. But S-Corp status allows you to split income between salary (not QBI-eligible) and distributions (QBI-eligible).
This can help optimize the deduction in certain situations.
Credibility and Professionalism
Some business owners appreciate:
- Formal payroll structure
- Clearer separation of personal and business
- W-2 income (helpful for mortgages)
- Corporate appearance to clients
Preparing for Growth
S-Corp structure can facilitate:
- Bringing in investors (within S-Corp limits)
- Formal ownership documentation
- Clearer governance structure
Eligibility Requirements
Before filing Form 2553, verify your LLC qualifies.
Your LLC Must Meet These
| Requirement | Details |
|---|---|
| Domestic entity | Must be US-based |
| 100 or fewer members | All family members count as one |
| Eligible members only | Individuals, certain trusts, estates |
| No foreign members | Cannot have non-US citizens/residents |
| One class of ownership | Can’t have preferred/common membership classes |
| Eligible business | Not insurance company, certain banks, etc. |
Common Disqualifiers
Foreign member (even 1%): A Canadian citizen with 5% ownership disqualifies the entire LLC from S-Corp election.
Multiple membership classes: If your operating agreement gives some members preferential distribution rights, you have multiple classes.
Too many members: More than 100 members (counting family as one) disqualifies you.
Ineligible entity type: Certain financial institutions can’t be S-Corps.
Check Your Operating Agreement
Before filing Form 2553:
- Review member consent requirements: Some agreements require unanimous consent for tax elections
- Check for conflicts: Ensure S-Corp election doesn’t conflict with existing provisions
- Amend if needed: Update the operating agreement to address S-Corp requirements
Form 2553 Filing Process
Here’s exactly how to file for S-Corp election.
Step 1: Determine Effective Date
Choose when you want S-Corp treatment to begin:
- January 1 of current year: Most common for existing businesses
- Date of formation: For new LLCs electing immediately
- Beginning of next year: If you miss the current year deadline
Step 2: Complete Form 2553
Part I: Election Information
- Line 1: LLC name and address
- Line 2: EIN
- Line 3: Date organized/formed
- Line 4: State of organization
- Line 5: Election effective date
Part II: Selection of Tax Year
- Most select calendar year (check box A)
- Fiscal year requires additional IRS approval
Part III: Member/Shareholder Consent
- ALL members must sign
- Include: Name, address, SSN, ownership percentage
- Date ownership was acquired
- Tax year ending date
- Signature
Part IV: Late Election Statement
- Only needed if filing after the deadline
- Statement explaining reasonable cause
Step 3: Get All Member Signatures
Every LLC member must sign Form 2553. No exceptions.
In community property states, spouses may also need to sign even if not listed as members.
Step 4: File with IRS
By mail: Send to the IRS address for your state (listed in Form 2553 instructions)
By fax: 855-887-7734 (for most states)
Keep copies of everything you send.
Step 5: Wait for Confirmation
The IRS sends acceptance letter (CP261) typically within 60-90 days.
If no response after 90 days, follow up by calling 800-829-4933.
Pro Tip: Make copies of everything before mailing. The IRS occasionally loses forms.
Filing Deadlines
The Form 2553 deadline is strict. Miss it and you wait until next year (unless late relief applies).
Timely Election Deadline
New LLC: Within 2 months and 15 days of formation
Existing LLC: By March 15 for current year (calendar year taxpayers)
For next year: Any time during the prior year
Deadline Examples
| Scenario | Deadline |
|---|---|
| New LLC formed January 1 | March 15 |
| New LLC formed July 1 | September 15 |
| Existing LLC wanting 2026 election | March 15, 2026 |
| Existing LLC wanting 2027 election | Any time in 2026 |
Weekend/Holiday Adjustments
If March 15 falls on a weekend or holiday, the deadline moves to the next business day.
2026: March 15 falls on Sunday. Deadline is March 16, 2026.
Mark Your Calendar
- Election deadline is NOT the same as tax return deadline
- March 15 for S-Corp election
- March 15 (or September 15 extended) for Form 1120-S return
Warning: This deadline is firm. Miss it by one day and you wait until next year (unless late relief applies).
Late Election Relief
Missed the deadline? Relief may be available, but it’s not guaranteed.
Rev Proc 2013-30 Relief
The IRS provides relief for late S-Corp elections if you meet these requirements:
- Intended to be classified as S-Corp from the intended effective date
- Had reasonable cause for missing the deadline
- Filed tax returns consistently with S-Corp election (as if it was made)
- Request relief within 3 years and 75 days of intended effective date
How to Request Late Relief
- Complete Form 2553 normally
- Write “FILED PURSUANT TO REV. PROC. 2013-30” at the top
- Attach a statement explaining:
- That you meet Rev Proc 2013-30 requirements
- That the LLC has been treating itself as S-Corp
- Reasonable cause for late filing
What Qualifies as Reasonable Cause
The IRS has accepted:
- Relied on accountant who failed to file
- Unaware of election requirement
- Company records lost in disaster
- Serious illness of responsible party
What Doesn’t Qualify
These explanations typically fail:
- “Didn’t know about the deadline” (ignorance of law)
- “Was too busy”
- “Wanted to wait and see”
If Relief Is Denied
- Election becomes effective for the following year
- Current year taxed as LLC
- May need to amend prior returns
Pro Tip: File on time. Late relief isn’t guaranteed and creates uncertainty.
Tax Consequences of Conversion
Good news: Converting your LLC’s tax treatment generally doesn’t trigger tax.
Generally No Tax Consequence
The conversion from LLC to S-Corp taxation is typically tax-free because:
- LLC is already a pass-through entity
- S-Corp is also pass-through
- No change in fundamental tax treatment
- No gain or loss recognition on election alone
Basis Carries Over
Your basis in LLC membership interest becomes your S-Corp stock basis. This matters for:
- Future distributions
- Loss deductions
- Eventual sale of the business
Holding Period Tacks
Time you owned LLC interest counts toward S-Corp stock holding period. Important for capital gains treatment on future sale.
Potential Issues
Built-in Gains (Rare for LLCs):
If your LLC was previously taxed as a C-Corp and has appreciated assets, built-in gains rules may apply. This is unusual for most LLCs.
Liabilities in Excess of Basis:
If LLC liabilities exceed your basis, conversion could trigger gain. This is rare for typical small businesses.
State Tax Considerations
Federal S-Corp election doesn’t automatically apply to state taxes:
| State | Requires Separate Election? |
|---|---|
| California | No (but $800 franchise tax applies) |
| New York | Yes (Form CT-6) |
| New Jersey | Yes (CBT-2553) |
| Texas | N/A (franchise tax, not income tax) |
Check your state’s requirements.
What Changes After Conversion
Understanding the practical changes helps you prepare.
Tax Return Changes
| Before | After |
|---|---|
| Schedule C (single-member) | Form 1120-S |
| Form 1065 (multi-member) | Form 1120-S |
| No K-1 (single-member) | K-1 issued to all members |
Payroll Requirements (Critical)
This is the biggest operational change:
- Must set up payroll immediately
- Owner-employees receive W-2 wages
- Payroll taxes deposited quarterly (or more frequently)
- File Form 941 quarterly
- Issue W-2s and file W-3 annually
You cannot operate an S-Corp without running payroll for working owners. See our payroll services for small businesses if you need help getting set up.
Reasonable Compensation
You must pay yourself reasonable salary before taking distributions:
- Document how you determined salary
- Keep comparable salary research
- Be prepared to defend your salary if audited
S-Corp Reasonable Compensation Guide
Estimated Tax Changes
Shareholders pay estimated taxes on K-1 income:
- Due April 15, June 15, September 15, January 15
- Plan for Q1 payment due April 15
What Stays the Same
Despite the tax election change:
- LLC legal status with state: Unchanged
- Operating agreement: Still governs the business
- Bank accounts: No change required
- Contracts: Still valid
- EIN: Usually keep the same one
- Liability protection: Unchanged
New Ongoing Costs
| Item | Estimated Annual Cost |
|---|---|
| Payroll service | $500-2,000 |
| Form 1120-S preparation | $500-1,500 |
| State compliance | $0-800 |
| Bookkeeping increase | $200-500 |
| Total | $1,200-4,800 |
Factor these costs into your decision.
Common Mistakes to Avoid
Learn from others’ errors.
Mistake 1: Missing the Deadline
March 15 is firm. File early, not on deadline day.
The fix: Set a calendar reminder for February. Submit Form 2553 at least two weeks before the deadline.
Mistake 2: Not Setting Up Payroll Immediately
Payroll must be running from the election effective date. Don’t wait until year-end.
The fix: Have payroll set up BEFORE the election effective date. If electing January 1, payroll should be ready to run in January.
Mistake 3: Forgetting State Election
Federal election doesn’t always cover state.
The fix: Research your state’s requirements. File separate state election if required.
Mistake 4: Setting Salary Too Low
Reasonable compensation is required. The IRS scrutinizes S-Corps with low or no salary.
The fix: Research comparable salaries, document your analysis, pay yourself a defensible amount.
Mistake 5: Not Documenting Reasonable Compensation
If audited, you need to justify your salary.
The fix: Create a written reasonable compensation study with market data.
Mistake 6: Forgetting to Amend Operating Agreement
Some operating agreements need updates for S-Corp treatment.
The fix: Review your operating agreement. Amend if needed to address S-Corp provisions.
S-Corp Reasonable Compensation Guide
Frequently Asked Questions
Do I need to form a corporation to be an S-Corp?
No. Your LLC can elect S-Corp tax treatment by filing Form 2553. You keep your LLC legal structure while being taxed as an S-Corp. This is the most common approach.
What is the deadline for S-Corp election?
For calendar year LLCs: March 15 to be effective for the current year. New LLCs: within 2 months and 15 days of formation. You can also elect at any time for the following year.
Can I make a late S-Corp election?
Yes, late election relief is available under Rev Proc 2013-30 if you meet certain requirements: intended to elect, filed consistently as S-Corp, reasonable cause for delay, and filed within 3 years and 75 days.
Is there a tax consequence to converting?
Generally no. The conversion from LLC to S-Corp taxation is usually tax-free since both are pass-through entities. Your basis carries over and holding period tacks.
Do I need to change my EIN?
Usually no. If your LLC is an existing entity, keep your current EIN. Only new entity formation typically requires a new EIN.
When do I need to start payroll?
Immediately upon the S-Corp election effective date. If electing January 1, you should have payroll set up before then. At least one paycheck must be issued to owner-employees before year-end.
Do I need to notify my state?
It depends on the state. Some states (NY, NJ) require separate S-Corp election. Others follow federal automatically. Check your state’s requirements.
Can I convert back to LLC taxation?
Yes, by revoking S-Corp status. However, you cannot re-elect S-Corp status for 5 years without IRS consent. Consider carefully before electing.
Next Steps
Ready to Convert?
- Verify eligibility: Review requirements above
- Calculate savings: S-Corp Tax Calculator
- Prepare Form 2553: Complete all sections
- Get member signatures: All members must sign
- File by deadline: March 15 for current year
- Set up payroll: Before effective date
The math isn’t always straightforward. We analyze your specific situation, calculate projected savings, factor in compliance costs, and handle the election process if it makes sense.
If you’re considering S-Corp election and want professional guidance on whether it’s right for your LLC, we can help. We’ll run the numbers for your specific situation and give you a clear recommendation.