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Updated: 9 hours ago Ask ACE

Ask ACE: How hard is it to make my LLC an S-Corp?

By Carrie Green Yardley, Yardley Esq. PLLC

Q: How do you change the legal status of an LLC to an S-Corp?

ACE advises: I get this question every tax season. Every season, I explain: under state law, there’s no such thing as an S-Corp, per se. You form your entity under state law (in your case an LLC), and then you elect S-Corp status with the IRS. If you’re already an LLC, you or your accountant can make the election by filing IRS Form 2553. To give you an idea of how straightforward this is, Form 2553 is also known as the “tick the box” form, because that is all the election requires. No lawyer needed, though I (or any other lawyer) would appreciate the heads up.

Accountants usually recommend the election to reduce self-employment taxes. A single-member LLC reports business income directly on a 1040 and pays self-employment tax on all net income (covering Social Security and Medicare). Electing S-Corp status lets you treat part of your income as payroll (subject to employment tax) and part as profit (potentially avoiding some tax). Whether it benefits you is case-specific — your accountant has likely already crunched the numbers.

To qualify, your business must:

  • Be a domestic corporation or LLC (not a partnership)
  • Have only eligible owners (U.S. individuals, some trusts, estates)
  • Have no more than 100 owners
  • Have one class of stock
  • Not be otherwise ineligible (rare for small businesses, so I won’t go into it here)

You will still be an LLC, just with a different tax treatment. I might suggest updating your operating agreement to protect your election status, but otherwise, there’s little for your lawyer to do. Also, your lawyer would appreciate a call if you add a non-resident alien to your membership, add a hundred and first member, or want to add another class of shares to your cap table.

Before electing, be sure you understand the additional administrative work and potential costs. Your accountant is the best person to advise you on that.

Carrie Green Yardley, founder of Yardley Esq. PLLC, is vice president of ACE and a contributing writer to Mainebiz. Her firm represents small business clients from formation through succession. Carrie can be reached at carrie@yardleyesq.com

About ACE

The Association for Consulting Expertise (ACE) is a nonprofit association of independent consultants who value “Success through Collaboration.” The public is welcome to attend its regular meetings to share best practices and engage with industry experts. For more information go to www.consultexpertise.com.

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