How to Change LLC to S Corp: A Step-by-Step Guide

Making the switch from a limited liability company (LLC) to an S corporation isn’t just a paperwork shuffle. It’s a strategic evolution in how your business handles: 

• Taxes

• Compliance

• Long-term growth

Many entrepreneurs reach a point where self-employment taxes cut too deeply into profits, which is when the S corp election becomes a smarter financial model. But this decision also introduces new responsibilities. Making the right decision requires a clear understanding of the tax benefits, drawbacks, and procedural requirements.

In this guide, we’ll break down how to change your LLC to an S corp, including eligibility criteria, Internal Revenue Service (IRS) filing requirements, compliance considerations, and whether it’s the right move for your goals. With expert guidance, navigating this complexity becomes a clear path to financial optimization and business growth.

Key Highlights

• Understand how LLC and S corp taxation differ and what it means for your take-home income.

• Calculate your potential tax savings by shifting to a salary-and-distribution model.

• Follow a clear step-by-step process to file IRS Form 2553, Election by a Small Business Corporation, and meet all election deadlines.

• Learn your obligations post-switch, from running payroll to keeping proper records.

• Get insights into how this change impacts future growth, fundraising, and exit strategies.

• Avoid costly mistakes with ongoing compliance support and audit defense.

Understanding the Core Difference: LLC vs. S corp Taxation

The Default LLC Tax Structure

LLCs are a legally flexible entity structure. By default, a single-member LLC is taxed like a sole proprietorship, and multi-member LLCs are treated as partnerships. LLCs feature pass-through taxation, where all profits pass through to the owners and are subject to self-employment taxes—15.3% covering the Social Security and Medicare programs. The business doesn't submit an income tax return, but each owner must file a personal tax return.

This simplicity is great early on, but it can get expensive as your business income grows.

What an S Corp Tax Election Changes

Electing S corp status doesn't change your business's legal entity. Instead, it changes your tax treatment under Subchapter S of the Internal Revenue Code. Owners who work in the business become employees, drawing a reasonable salary subject to payroll taxes. At the same time, the remaining profits can be distributed as dividends, not subject to self-employment tax.

This is where the savings start for S corp owners. 

The Primary Driver: Calculating Your Potential Tax Savings

Tax Differences with Salary and Distributions

Here’s a simple example of tax differences with salary and distributions.

Your LLC earns $100,000 in net income. As an LLC, you pay self-employment tax on the full amount—that’s $15,300 in taxes. With an S corp election, let’s say you pay yourself a $50,000 salary (subject to FICA taxes), and the other $50,000 is taken as a distribution, avoiding those extra taxes.

In this scenario, your FICA tax burden could drop by thousands.

Determining a "Reasonable Salary"

The IRS requires that S corp owners who contribute significant services to the business receive a fair salary. This isn’t just a suggestion—it’s a compliance rule. The right salary depends on:

• Your role

• Industry standards

• Business profits

Get this wrong, and you risk penalties. Many business owners work with professional tax advisors to benchmark a reasonable figure and adjust it annually.

When Should You Change from LLC to S Corp?

There’s no universal number, but generally, once your LLC is earning $40,000 to $80,000 in profit, the tax savings from an S corp start to outweigh the extra costs.

When this happens, it's an ideal time to speak with an accounting expert about your options.

A Step-by-Step Guide on How to Change LLC to S Corp

Verifying Your LLC’s Eligibility

To elect S corporation status and maintain it, there are strict eligibility guidelines. Some guidelines are similar to those of a C corporation, but S corps avoid the double taxation that C corps are subject to. To change from an LLC to an S corp, you must: 

• Be a domestic entity

• Have no more than 100 shareholders

• Issue a single class of stock

• Be owned by eligible parties (individuals, certain trusts, estates)

• Cannot be owned by partnerships, corporations, or non-resident aliens

Filing IRS Form 2553: The Official S Corp Election

To make your S corp election, prepare and file IRS Form 2553. This form should include: 

• Business name

• EIN

• Effective date of the election

• Signatures of all shareholders

Be precise—even small mistakes can cause delays or rejection.

Critical Deadlines and Timing Your S Corporation Election

To apply for S corp status for the current tax year, Form 2553 must be filed within 75 days of forming your business or by March 15 of the current year for existing entities.

If you miss this deadline, you may qualify for late election relief, but it’s best to act early or by the deadline.

Steps to Take After S Corporation Election for Compliance

Establishing a Formal Payroll System

Once your LLC becomes an S corp, paying yourself through payroll is mandatory if you work for your business. Running payroll involves:

• Calculating taxes

• Making withholdings

• Remitting payroll tax to federal and state agencies

Using a full-service payroll provider simplifies the process, saving countless hours per pay period, while ensuring compliance.

Adopting Corporate Formalities

Unlike a simple LLC, an S corp must maintain records such as:

• Shareholder meeting minutes

• Bylaws

• Stock ledgers

These formalities protect your S corp liability shield and help you stay audit-ready. It’s smart to integrate these processes with professional, full-service bookkeeping solutions powered by real bookkeepers.

Navigating Distribution Rules

S corps lack the flexibility of LLCs. For example, S corps must distribute profits according to ownership percentages. Make sure distributions are tracked correctly and supported by accurate accounting. Improperly categorized payouts can lead to costly distractions.

Strategic Implications: Is the S Corp Election Right for Your Future?

Impact on Growth and Fundraising

S corp status has fundraising limitations. To maintain this tax status, you can’t have foreign investors or multiple classes of stock, which can limit your ability to raise capital through venture capital or equity funds.

Consider this with your tax advisor if your long-term goals involve aggressive scaling or acquisitions.

Aligning with Your Exit Strategy

If you plan to sell your business, your business structure can affect how the deal is taxed. S corps often qualify for favorable treatment in asset sales, but you’ll want professional expertise to ensure the optimal business entity structure and weigh your specific exit plan.

The Value of a Holistic Professional Review

Choosing S corp status isn’t just about tax savings. It’s about aligning your: 

• Business model

• Financial systems

• Growth strategy

Schedule a free 30-minute review with a small business expert to explore personalized guidance.

Minimizing Tax Mistakes and Key Compliance Pitfalls

The most common errors S corps make include: 

• Setting an artificially low salary

• Missing payroll filings

• Making distributions that don’t match ownership percentages

These mistakes can void your S corp status or trigger back taxes and penalties that may disrupt your operations and impact your reputation with investors. 

Proactive tax planning, professional payroll, and real-time bookkeeping can prevent these issues before they arise and keep you audit-ready. You don’t just need a tax preparer—you need a year-round partner capable of guiding your business when the IRS has questions.  

Unlocking Your Business's Full Potential with 1-800Accountant

Transitioning from LLC to S corp is a milestone in your business journey and a powerful, complex tool. But it’s not just about filing a form. It’s about creating a smarter, more scalable financial engine for your business.

At 1-800Accountant, America's leading virtual accounting firm, we guide you through the process from day one. Our CPAs, EAs, bookkeepers, and corporate tax professionals can assess your eligibility, calculate projected savings, prepare and file Form 2553 accurately, and set up payroll and books to ensure compliance while maintaining S corp eligibility for federal tax purposes. When you trust 1-800Accountant with your S corp's complex financial work, expect: 

• Year-round advisory and strategic tax planning

• Flat-rate pricing, no surprise fees

• Full-service payroll and compliance solutions tailored to your budget

Let’s build your business’s next chapter together. Schedule a free, 30-minute consultation to get started. 

LLC to S corp Switch FAQs

How much does it cost to switch to an S corp?

The cost of the conversion process varies. Filing Form 2553 is free, but you’ll likely need payroll software, tax support, and possibly legal advice. Many business owners find that the tax savings far outweigh these costs.

What’s the revenue threshold where it becomes a wise decision to become an S corp?

Typically, once your LLC generates $40,000–$80,000 in annual profit, the S corp structure begins to offer net tax savings.

How big a payroll is necessary to make switching to an S corp a strategically sound choice?

There’s no fixed amount, but your salary must be reasonable based on your role, industry, and earnings. Often, this accounts for between 30% and 70% of total profits.

How many shareholders can an S corp have?

S corps can have up to 100 shareholders, and all must be U.S. citizens or qualifying trusts or estates.

What type of businesses are not eligible to become an S corporation?

Financial institutions, insurance companies, and international sales corporations are ineligible for S corp status.

What are the disadvantages of being an S corp?

S corps face more administrative requirements, have limits on shareholders and stock classes, and must run a formal payroll system. These can be hurdles for small or side businesses that enjoy the simplicity of operating with fewer formalities.