How do you form an S-Corp?

To register your business as an S corporation with the IRS, you must submit<a href="https://llcguys.com/business-guides/form-2553-instructions-what-it-is-why-irs-form-2553-is-important/" target="_blank" rel="noreferrer noopener"> Form 2553.</a>

What are the requirements for an S-Corp?

S Corp companies must adhere to four specific criteria: •They are restricted to a maximum of 100 shareholders. •Only private individuals – not other entities or businesses - can be shareholders. •Nonresident aliens cannot be owners in an S corporation. •Furthermore, they may only issue one class of stock; thus, all members receive the same proportions when it comes to distributions.

How to Change an LLC to an S-Corp? A Beginner-Friendly Guide

Hire Professionals to Form an S-Corp Today (from $0 + state fees)

Converting your LLC to an S-Corp for tax purposes can be a complex process, yet it is totally attainable! You can submit the required documents to make this transition along with your income taxes. Doing so could provide you with several key benefits, such as reducing self-employment taxes and providing flexible salary options.

When you elect to be taxed as an S-Corp, the transition may not take effect until the following tax year. For this reason, it is essential that your current tax return accurately reflects such facts if applicable. Additionally, although filing with the IRS for treatment as an S-Corp alters your taxation status, it does not alter any other legal elements of your LLC business structure.

If you want to skip the hassle of starting an S-Corp yourself, consider using professional help from the best service providers in the market:

Northwest Registered Agent ($39+state fees) (best support)
ZenBusiness ($0+state fees) (best price)

Quick Navigation

Hire Professionals to Form an S-Corp Today (from $0 + state fees)
Pros and Cons of Changing an LLC to an S-Corp
Before You Change Your LLC Structure to an S-Corp
Form 2553 & Eligibility Convert an LLC to S-Corporation
- File IRS Form 2553
How to Convert Business Formation from An LLC to An S-Corp
How Does an S-Corp Differs From a C-Corp?
How To Know If S-Corp Tax Election Is Right for You
When Is The Right Time To Convert Your LLC To S-Corp?
Should I Convert from LLC to S-Corp or Not?
Get Professional Help in Forming an S Corp Today
- #1 – Create an S-Corp Using Northwest Registered Agent
- #2 – ZenBusiness Can Help You Form an S-Corp
FAQs

Pros and Cons of Changing an LLC to an S-Corp

All LLCs and small business owners should go through these pros and cons before deciding to convert their LLC to an S-corp.

Pros

Making a shift from an LLC to an S-Corp can provide significant advantages for small businesses.

Not only will self-employment taxes be reduced due to the corporation tax status, but this change can also provide businesses with more options when it comes to income tax purposes.
With the right setup, an S-corp may even allow businesses to avoid double taxation and offer owners the ability to deduct both business losses and health insurance costs on their personal income taxes.
Generally speaking, an S-corp structure offers greater asset protection and flexibility compared to that of the LLC structure.
Additionally, if there are more than one owner in the business, changing from an LLC to an S-Corp can also ensure more comprehensive organizational structures with respect to ownership rights.

As a result, switching from LLCs to S-Corps has become a popular option for small business owners looking for greater flexibility, improved asset protection, and a better-organized platform for handling finances.

Cons

When it comes to federal tax purposes, changing a limited liability company (LLC) to an S-corp may not be advantageous. Keep in mind that changing from an LLC structure to a corporation status is considered a liquidation and would bring about certain drawbacks.

For one, profits of the LLC will be taxed both as corporate income and shareholders dividends.
Moreover, assuming there are members in the LLC and they contribute property or services in exchange for membership interests, they would be liable for any gain that meets the requirements of Section 751 of the Internal Revenue Code when they distribute such profits as dividends instead of distributing them as earnings of members.

Ultimately, when making a decision to switch from an LLC to an S-corp status, you must assess your personal financial situations and determine if this change works best for you and your business.

Before You Change Your LLC Structure to an S-Corp

What Is an S-corp?

An S-corp is an advantageous tax election that both LLCs and corporations can adopt, as it may drastically reduce self-employment taxes based on the profits earned. This could be a game changer for your business – make sure to take advantage of this opportunity!

Consider Whether Changing To an S-Corp Is Advantageous For You & Your Business

Limited Liability Companies (LLCs) typically have ‘pass-through’ taxation, wherein any business profits and losses are passed directly to the owners or members of the LLC for personal tax purposes. Single-member LLCs would be treated as sole proprietorship in terms of taxation, whereas multiple-member LLCs will be taxed as partnerships. All members must also take into account self-employment taxes which include funds that support Medicare and Social Security programs.

LLCs, even single-member ones, can decide to be taxed as S-corps, which offers the same personal liability protection and management flexibility of an LLC. With this taxation method in place, owners get the opportunity to become employees of their own company and will have a reasonable salary that is subject to payroll taxes. Simultaneously, however, additional business profits are only subjected to income taxes – not both!

Confirm Your Business Is Eligible to Operate as An S-Corp

If you want to elect S-corp taxation for your business, you must meet the necessary criteria:

Be a US firm with no more than 100 members and shareholders;
Have only one class of stock; and
Shareowners can consist of individuals plus certain trusts and estates.

However, partnerships, enterprises, or nonresident aliens are not allowed as shareholders.

Form 2553 & Eligibility Convert an LLC to S-Corporation

To make your LLC eligible for S-Corporation federal taxation, it is necessary to fill out and submit Form 2553 with the IRS. But don’t forget: you must complete this form by March 15th in order to convert the LLC by that year or within 75 days of opening if you are starting a new business. Making an election for tax purposes has never been simpler!

What is Form 2553 & instructions on how to file it.

Don’t miss the deadline! If you do, though, you may request late election relief from the IRS if there is a valid excuse. Just keep in mind that with this option, your company’s entity type remains unchanged—the federal tax classification merely shifts. And even though the LLC is classified as an S-Corp by the IRS, it still must be taxed like an LLC according to the state laws where it was formed.

To restructure your LLC to a Corporation, you must first complete the formal conversion process mandated by your formation state. While some states have an established procedure in place, others may require certain alternative methods.

File IRS Form 2553

If you are converting your LLC to an S-Corp, make sure you file IRS Form 2553. To ensure the tax election is effective for the full year, you must submit this form prior to March 15th of that same year or during any time in the previous year. Additionally, if your LLC was just established and has yet to launch operations, simply file Form 2553 within 75 days following formation and everything will be taxed as an S-Corp from then on!

How to Convert Business Formation from An LLC to An S-Corp

You don’t have to become a corporation in order to select the S-Corp tax classification. Yet, if your yearly profits tend to be quite considerable or carry over from one year into another, you might consider changing your LLC into an official C-corporation (C-Corp), instead of opting for being taxed as an S Corporation.

If you’re looking to transition your LLC into a corporation for management and formation purposes, it’s vital that you officially change the business with the secretary of state in your state. Get in contact with them so you know precisely what requirements as well as fees are necessary before committing.

How Does an S-Corp Differs From a C-Corp?

The bottom line is taxes. By default, a C-corp organization incurs double taxation: first at the business level, and then again when profits are paid out to the owner(s) as dividends or distributions. On the other hand, an S-corp only gets significant tax exposure once income reaches the owners’ individual returns through these same distribution methods.

Our full LLC vs. S-Corp comparison.

How To Know If S-Corp Tax Election Is Right for You

If your LLC is able to pay a reasonable salary and distribute annual profits among its members, electing S-corp tax status could be beneficial. To ensure that you make the right decision for your business, it’s best to consult with an experienced tax advisor before making any changes.

When Is The Right Time To Convert Your LLC To S-Corp?

For tax purposes, it’s smart to consider converting an LLC into an S-Corp when the self-employment taxes exceed what your S-Corp would pay. Usually, if you have $40k in net income or more annually, changing over is worth considering – even at lower earnings like $25k per year.

The specifics of this situation depend upon multiple numbers of factors, such as:

Salary Amount

S-Corp owners may receive a salary out of the profits. It can be tough to provide an exact dollar figure since it depends on both the industry and net income. On that note, you might come across guidance stating salaries should take up two thirds of net income; however, this is not absolute so it’s best taken with caution. The ideal wage amount must reflect market trends and be justifiable when warranted.

Foreign Earned Income Exclusion (FEIE)

For business owners who qualify for the Foreign Earned Income Exclusion, income tax can be excluded up to a maximum of $107,600 (2020).

State

In many states, including California and New York, taxation at the S-Corp level as well as the individual shareholder level occurs. What’s more, in New York even if an individual does not live there they are still taxed by the S-Corp on their behalf. While this reduces potential tax savings from switching from LLC to S Corp within those states, it is often still beneficial for conversion due to retirement savings options attainable through that change.

Should I Convert from LLC to S-Corp or Not?

The decision to convert from an LLC, partnership, or sole proprietorship to an S-Corp should only be made when your business profits exceed the amount you’d sensibly pay yourself in salaries. Analyzing tax effects that apply to your individual circumstances might become complex and thus it is best advised to consult a certified accountant or tax advisor on this matter.

Get Professional Help in Forming an S Corp Today

It can be difficult and time-consuming to form an S-Corp all by yourself.
That’s why we decided to give you a few of the best options for professional services that can help you start an S-corp in no time & with 0 effort!

#1 – Create an S-Corp Using Northwest Registered Agent

Northwest has vast experience in creating LLCs and Corporations. They by far have the best support and client satisfaction rate. We’ve used and tested them ourselves and can guarantee that they’ll do an exceptional job for you.
You can read our full & extensive Northwest Registered Agent review here.

$39+State Fees

Go to NorthWestRegisteredAgent.com

Rating: 4.9/5
Review count: 4850+

Form an LLC today with Nortwest. They have 98% customer satisfaction rating and over 4150+ verified reviews. They will include 1 year of free registered agent service!

#2 – ZenBusiness Can Help You Form an S-Corp

ZenBusiness is one of our top-rated LLC services as well. They have a super value-to-price ratio. And it’s perfect for those who are looking for the cheapest option to form their LLCs. When we tested their service — they’ve done a great job, so we can honestly recommend them.
To know more about them — read our ZenBusiness review here.

$0 + State Fees

Go to ZenBusiness.com

Rating: 4.8/5
Review count: 4830+

Form an LLC today with ZenBusiness for only $0 + State fees. They Have 98% customer satisfaction rating and over 4830+ verified reviews.

FAQs

What is an S-Corp?

An S corporation, or “S-corp,” is an advantageous tax designation that can be applied to both LLCs and corporations.

Is an S-Corp an LLC?

Absolutely not! An S-corp is an elected designation for either an LLC or corporation that changes the company’s taxation status.

How do you form an S-Corp?

To register your business as an S corporation with the IRS, you must submit Form 2553.

What are the requirements for an S-Corp?

S Corp companies must adhere to four specific criteria:

•They are restricted to a maximum of 100 shareholders.
•Only private individuals – not other entities or businesses – can be shareholders.
•Nonresident aliens cannot be owners in an S corporation.
•Furthermore, they may only issue one class of stock; thus, all members receive the same proportions when it comes to distributions.

What are the benefits of an S-Corp?

As an owner of an S-corp, you are regarded as a company employee and benefit from saving thousands of dollars on self-employment taxes.

Are taxes for LLCs and S-Corps the same?

Absolutely not! The taxes for a Limited Liability Company (LLC) and an S Corporation are two completely different entities, and thus their tax rates differ.

As a S corp, owners are required to pay their own income tax and self-employment taxes based on the salary they set for themselves. Whatever profits remain after this can then be removed from the business as a “distribution,” which isn’t subject to self-employment taxes.

With an LLC, all profits of the company will be included in their owners’ personal tax returns. This means that those same individuals must pay personal income and self-employment taxes on all of these earnings.

The Tax Cuts and Jobs Act of 2017 offers a sizeable incentive to LLCs and S corps – owners are able to deduct 20% from their taxes when they maintain qualified business income (QBI). But, unfortunately for S corp owners, the deduction does not extend itself to profits remunerated as wages.

What is a reasonable salary for an S-Corp?

When you choose an S-corp over the typical LLC business structure, it works in your favor as owners are considered employees of the company and must only pay self-employment tax on the salary they receive. Anything else taken from company profits is not subjected to self-employment taxes–a major benefit that sets this type of corporation apart!
S-corp owners must be paid an appropriate salary, equivalent to the industry standard for their qualifications, duties and responsibilities. This is in place to prevent them from earning a low income solely for the purpose of lowering self-employment tax payments.

What is a distribution?

As an owner, if you are looking to take a profit from the business remaining after all salaries have been paid out, then look no further than distributions. While they may subject to personal income tax payments, shareholders can rest assured that distributions are exempt from self-employment taxes!

What is pass-through taxation?

Pass-through taxation is the mode of taxation usually assigned to sole proprietorships, partnerships, LLCs, and S corporations. With this structure in place, businesses do not pay taxes on their profits or losses at a corporate level; instead they pass through to each owner’s individual income returns where they are taxed depending upon that particular person’s personal tax rate.

What is the S-Corp tax rate?

Unlike the corporate tax rate, owners of S corps are obligated to pay personal income tax on the company’s profits – with this amount depending on their individual taxation bracket.

Can I still use my DBA name if I elect to be an S-Corp?

By selecting the S corp election, LLCs and corporations performing under a doing business as (DBA) name can take advantage of its favorable tax treatment.

What is the difference between an S-Corp and C-Corp?

Although many individuals confuse C corporations (C corps) and S corporations (S corps) as business structures, they are actually two different forms of tax statuses. An S corp allows proprietors to be taxed like employees of the company, potentially minimizing their taxes in certain conditions. On the other hand, companies that opt for taxation through a C corp may face double taxation; however, its benefits can outnumber this minor setback at times.