To change an S Corp to an LLC, you first need to know what the underlying entity actually is. “S Corp” is a tax classification, not an entity type. If your business is a state-law corporation that elected S-Corp treatment, you convert the corporation to an LLC at the state level and then decide whether to keep or drop the S election. If your business is already an LLC that elected S-Corp taxation, no entity conversion is needed at all: you just revoke the tax election with the IRS. The paperwork is manageable in either case. The tax consequences are where the real decisions get made.
Figure Out Which Situation You’re In
Pull your formation documents. If you filed articles of incorporation and later submitted Form 2553, you’re a corporation with an S-Corp election.1Internal Revenue Service. About Form 2553, Election by a Small Business Corporation If you filed articles of organization for an LLC and then submitted Form 2553, you’re an LLC taxed as an S-Corp.
That distinction changes everything that follows. An LLC that revokes its S election simply falls back to its default classification: partnership if it has multiple members, disregarded entity (taxed like a sole proprietorship) if it has one.2Internal Revenue Service. Limited Liability Company – Possible Repercussions A corporation that revokes its S election reverts to C-Corp status, not LLC status. Changing to an LLC requires a separate state-level entity conversion.
One useful option people miss: you don’t have to drop the S-Corp election just because you convert the entity to an LLC. An LLC is eligible to elect S-Corp tax treatment. If the reason for the change is operational flexibility rather than tax, converting the corporation to an LLC while keeping the S election often gives you what you want without the tax bill described below.
Converting the Corporation to an LLC
Start with internal approval. Your board votes to approve a conversion plan, and shareholders holding more than half the shares must consent. Your state’s corporate code or your own bylaws may set a higher threshold, so check both before you schedule the vote.
Most states offer a streamlined path called statutory conversion. You file articles of conversion (or a similarly named form) with the secretary of state, and the corporation legally becomes an LLC without dissolving or forming a new entity. Contracts, licenses, and the EIN carry over because it’s the same legal entity in the eyes of the state. Filing fees typically run a few hundred dollars, though they vary. Most states will want a certificate of good standing on file first.
If your state doesn’t offer statutory conversion, the alternative is to dissolve the corporation, form a new LLC, and transfer assets, contracts, and liabilities across. This is messier. It can trip anti-assignment clauses in leases and vendor agreements, and it requires a new EIN from the IRS. A corporate dissolution also requires filing Form 966 within 30 days of adopting the dissolution plan.3Internal Revenue Service. Form 966 – Corporate Dissolution or Liquidation When statutory conversion is available, use it.
Revoking the S-Corp Election
If you want the business taxed under the LLC’s default rules rather than as an S-Corp, you have to affirmatively revoke the election. Send a statement of revocation to the IRS service center where the business files its annual return. Shareholders holding more than half the outstanding shares must consent.4Office of the Law Revision Counsel. 26 USC 1362 – Election; Revocation; Termination
Timing matters. For the revocation to take effect on the first day of the current tax year, the IRS must receive it by the 15th day of the third month. For a calendar-year business, that’s March 15. File after that and the revocation takes effect on the first day of the following tax year, unless you name a specific future date.5Internal Revenue Service. Revoking a Subchapter S Election Line up the revocation date with the state entity conversion so you don’t spend months in a mismatch where the entity has changed but the tax election hasn’t.
The Deemed Liquidation and Your Tax Bill
This is where the money is. When a corporation with S-Corp status converts to an LLC taxed as a partnership or disregarded entity, the IRS treats the transaction as if the corporation distributed all of its assets and liabilities to its shareholders in a complete liquidation, and the shareholders then contributed those assets to the new LLC. It’s called a deemed liquidation, and it comes from Treasury Regulation 301.7701-3(g). No assets actually move. The tax is real anyway.
If the fair market value of the business’s assets exceeds the shareholders’ tax basis in their stock, the difference triggers capital gains tax at the shareholder level. For an S-Corp that was always an S-Corp, gain is taxed only once, at the shareholder level. That’s a real advantage over the same move from a C-Corp, which can produce tax at both the corporate and shareholder levels. It’s still not free. Appreciated real estate, intellectual property, or equipment can produce a serious bill.
The offsetting benefit: after the deemed liquidation, the assets inside the new LLC take a fresh basis equal to their fair market value at the time of conversion. Higher basis reduces tax when those assets are eventually sold. You’re paying tax now for a step-up you’ll recover later.
If the Business Was Ever a C-Corp
Two extra items come into play if your S-Corp used to be a C-Corp.
The first is the built-in gains tax under Section 1374. It targets appreciation that already existed in the company’s assets when it converted from C-Corp to S-Corp status. If those assets are sold, or deemed sold, within five years of the C-to-S conversion, the built-in gain is taxed at the highest corporate rate, currently 21%.6Office of the Law Revision Counsel. 26 USC 1374 – Tax Imposed on Certain Built-In Gains The five-year window was made permanent by the PATH Act in 2015. A conversion to LLC that triggers a deemed liquidation counts as a disposition, so where you stand in that five-year window is critical to the timing.
The second is accumulated earnings and profits from the old C-Corp years. During normal S-Corp operations, distributions generally come out tax-free up to the shareholder’s stock basis. When C-Corp-era earnings and profits get distributed as part of a conversion, they can be taxed as ordinary dividend income rather than capital gains. Any business with C-Corp history should have an accountant quantify these before signing anything.
The Self-Employment Tax You’ll Start Paying
The one-time conversion tax gets attention. The ongoing cost is what catches people off guard.
Under S-Corp tax treatment, only the reasonable salary paid to owner-employees is subject to Social Security and Medicare taxes. Profits distributed on top of that salary are not subject to payroll taxes.7Internal Revenue Service. S Corporation Employees, Shareholders and Corporate Officers That split is the whole reason many small businesses elect S-Corp status in the first place.
Drop the election, and the LLC’s net earnings become subject to self-employment tax in full. The combined rate is 15.3%: 12.4% for Social Security on earnings up to $184,500 in 2026,8Social Security Administration. Contribution and Benefit Base plus 2.9% for Medicare with no cap. An additional 0.9% Medicare surtax kicks in on earnings above $200,000 for single filers or $250,000 for joint filers.
A concrete example. A business nets $150,000, and the owner had been drawing a $70,000 salary under S-Corp treatment. Employment taxes ran on the $70,000. Convert to a default LLC, and self-employment tax applies to the full $150,000. Depending on income levels, the annual difference can run $8,000 to $12,000 or more. If flexibility is the real goal and you don’t need to escape S-Corp taxation itself, converting the entity to an LLC while keeping the S election is usually the better move.
EIN, Contracts, and Operating Agreement
A statutory conversion keeps the same legal entity, so the EIN carries over.9Internal Revenue Service. When to Get a New EIN Dissolving the corporation and forming a new LLC requires a new EIN, and every bank account, credit line, payroll system, and tax registration that references the old number has to be updated. That alone is a strong argument for statutory conversion where your state allows it.
Review commercial leases, financing agreements, and major vendor contracts before you file anything. Anti-assignment clauses can treat an entity-type change as a default even if ownership and management are identical. Statutory conversion is less likely to trip these clauses than a dissolve-and-reform, but the contract language controls, and written landlord or lender consent is often the safe path.
Payroll mechanics change too. Under S-Corp treatment, health insurance premiums paid for a shareholder-employee who owns more than 2% of the company are reported as wages on the W-2 but are exempt from FICA and FUTA, and the shareholder can deduct those premiums on the personal return.10Internal Revenue Service. S Corporation Compensation and Medical Insurance Issues As a default LLC, that shifts to the self-employed health insurance deduction, with different eligibility rules.
Finally, draft an operating agreement, even for a single-member LLC. It governs ownership percentages, distributions, voting, and what happens when a member exits. Courts look at operating agreements when deciding whether limited liability protection holds up, so this is not optional paperwork. Corporate bylaws and any shareholder agreement need to be reworked into LLC terms rather than carried over as-is.