FAQ LLC Converting to S Corp
If you have an LLC and are considering converting to an S Corp, here are the questions you should be thinking about.
Can you convert an Existing LLC to an S Corp?
Yes, an LLC can be converted into an S Corporation for tax purposes by filing Form 2553, “Election by a Small Business Corporation”.
How do S Corps save on taxes?
The primary benefit of electing S Corporation status is that owners are able to reduce their self-employment tax burden. Under the typical passthrough structure, owners must pay self-employment tax (15.3%) on all of their net profit. Under S Corporation status, only the amount the S Corporation pays to its owner in wages is subject to the tax.
How much does it cost to convert an LLC to an S Corp?
The initial conversion election is free to file with the IRS, but to ensure eligibility and file accurate conversion documents, a CPA will typically charge initial setup and conversion fees of $400-$2,000, depending on complexity. S Corporations also require filing an additional tax return each year and maintaining higher-quality accounting records. The typical additional annual cost is $2,000+.
What are the main disadvantages of an S Corp?
S Corporations have an additional administrative burden with the requirement to maintain full financial statements. Additionally, S Corporations have strict ownership limits. S Corporations also require that all income and distributions be split among owners based solely on their ownership percentage.
Can S Corp status be revoked?
Yes, an S Corporation can voluntarily revoke its S Corporation status.
What is the 5-year rule for S Corps?
If an S Corporation elects to voluntarily revoke its S Corporation status, it must wait at least five years before it is eligible to re-elect into S Corporation status.
What is the 2% rule for S Corps?
S Corporation owners who own more than 2% of the company must include any fringe benefits in taxable wages. These fringe benefits include health, dental, vision, life insurance & HSA contributions.
At what income is an S Corp worth it?
An S Corporation election typically makes sense once net business income exceeds $75,000. At that point, the tax savings typically outweigh the additional administrative costs and complexities. However, each situation is unique, and S Corporation status is not always the best option for every taxpayer.
Do you get a new EIN when converting an LLC to an S Corp?
No, you do not need to get a new EIN when you convert your LLC to an S Corporation. The underlying legal entity is still the LLC; the only thing that changes is the tax classification.
Can I retroactively file as an S Corp?
Yes, you can potentially file for a late election relief. Not all entities are eligible, and it’s important to consult with a tax professional before pursuing late election relief.
Can you switch S Corp mid-year?
Yes, an LLC can elect S Corporation Status at any time, but doing so mid-year can make the initial tax return filing more complex, as the income will need to be split between two different returns.
If you want professional guidance on how to implement these tax strategies before year’s end. Reach out, our team is here to help.
PJ Donohue, CPA