Question: My accountant says that I need to turn my LLC into an S corporation. How do I do that?
Answer: First you need to understand that the term “S corporation” refers to a method of income tax under the Internal Revenue Code of 1986. S corporation is one of four federal income tax methods that can apply to a limited liability company.
You do not have to convert your LLC into a corporation. Instead, the LLC simply makes an election with the IRS to have the LLC taxed as an S corporation by having all members of the LLC sign an IRS Form 2553 and then file the signed Form 2553 with the IRS. See the Instructions to IRS Form 2553. If you want your LLC to be taxed as an S corporation for the tax year beginning January 1, 2021, the members must sign and file IRS Form 2553 with the IRS not later than March 15, 2021.
Caution: There are certain requirements that must be satisfied for an LLC to eligible to elect to be taxed as an S corporation. An LLC may to elect to be an S corporation only if it meets all the following tests.
- It is (a) a domestic corporation, or (b) a domestic entity such as an LLC eligible to elect to be treated as a corporation, that timely files Form 2553. If Form 2553 is not timely filed, see Relief for Late Elections, later.
- It has no more than 100 shareholders. You can treat an individual and his or her spouse (and their estates) as one shareholder for this test. You can also treat all members of a family (as defined in section 1361(c)(1)(B)) and their estates as one shareholder for this test.
Its only shareholders are individuals, estates, exempt organizations described in section 401(a) or 501(c)(3), or certain trusts described in section 1361(c)(2)(A).
It has no nonresident alien shareholders or members.
It has only one class of stock (disregarding differences in voting rights). Generally, a corporation or LLC is treated as having only one class of stock if all outstanding shares of the corporation’s stock or LLC’s membership interests confer identical rights to distribution and liquidation proceeds.
There are other requirements, but the major requirements are listed above. For more about S corporations and LLCs read my blog post called “S Corporation Ignorance.”
P.S. Besides the S corporation federal income tax method, an LLC can also be called taxed as a sole proprietorship (if it has one member or two members who are married and own their membership interests as community property) partnership (if it has two or more members), a C corporation.