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:
- 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.
- There is no limit on the owners of the business in LLCs, while in the S corp, the ownerships should not exceed 100 shareholders.
- 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.
- 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.
How to Convert an S Corporation to LLC in any State
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