Converting an S Corporation to an LLC | 50-State Guide 

Generally, an S corporation and LLC both offer limited liability protection to business owners and are taxed as pass-through entities. However, sometimes you need to switch from an S corporation to LLC status due to specific situations. This guide will talk about how to change an S corporation to LLC in all 50 states.

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Why Convert S Corp to LLC

If you are confused between LLC vs. S corp, here are some reasons you must take into account while converting S corp into LLC:

  1. LLCs generally offer better protection from personal creditors compared to corporations. In other words, the owners’ personal assets are better protected from creditors in LLCs as creditors can only obtain a charging order against distributions from the LLC. Whereas, in the case of corporations, creditors who control the corporations’ stock essentially control the whole corporation. 
  2. There is no limit on the owners of the business in LLCs, while in the S corp, the ownerships should not exceed 100 shareholders.
  3. There are no restrictions on citizenship in the case of LLC. The LLC owners can also be non-U.S. citizens/residents, or other businesses such as trusts, corporations, LLCs, and partnerships can own an LLC. This is not the case with corporations.
  4. S corporation conversion to an LLC is treated as a taxable liquidation of the S corp. If any gain on the deemed liquidation is offset by suspended losses, the conversion to LLC is a viable option.

Changing an S Corporation to an LLC

Most states allow an S corporation to directly convert to an LLC through a process called Statutory Conversion. Only a few states do not have the statutory conversion option in their jurisdiction, and they are listed below:

States that Do Not Allow Direct Conversion of an S Corp to an LLC (Statutory Conversion)

You have to look for alternatives such as non-statutory conversion and LLC merger in such states. Business owners who do not want to directly convert their S corporation to an LLC due to any reason can also change their corporation to LLC using these alternatives.

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