How you change an S Corp to an LLC depends on what your business actually is under state law. About half of the businesses operating as “S Corps” are already LLCs that elected S Corp tax treatment, and for them the change is a tax filing, not a new entity. If your business is a true corporation, you’re looking at either a statutory conversion or a full dissolution and reformation, both of which trigger the same federal tax consequences even though the state paperwork differs. Either way, the taxes matter more than the mechanics, so plan those first.
Figure Out What Your S Corp Actually Is
“S Corp” is a federal tax classification, not an entity type. It’s an election made under the Internal Revenue Code that lets a qualifying business pass income, losses, deductions, and credits through to its owners instead of paying corporate-level tax.1Internal Revenue Service. S Corporations Both corporations and LLCs can hold that status, and your path to a standard LLC depends entirely on which one you formed.
Pull your formation documents. Articles of incorporation mean you have a corporation. Articles of organization mean you already have an LLC and only elected S Corp taxation on top of it. Your state’s secretary of state website will confirm which is on record.
If You’re Already an LLC: Revoke the S Election
An LLC that elected S Corp treatment (typically by filing Form 2553) doesn’t need to form a new entity to return to standard LLC taxation. The work is all on the IRS side.
Revocation requires written consent from shareholders holding more than half the ownership interests, sent to the IRS service center where you file your return.2Office of the Law Revision Counsel. 26 U.S. Code 1361 – S Corporation Defined Filed within the first two and a half months of the tax year, it takes effect for the current year. After that, it defaults to the following tax year unless you specify a later effective date.
Here’s the trap. Revoking S Corp status doesn’t send your LLC back to partnership or disregarded-entity treatment. It drops you into C Corp classification and its double taxation. To land back at default LLC taxation, you also file Form 8832, Entity Classification Election.3Internal Revenue Service. About Form 8832, Entity Classification Election Time the two filings with a tax professional. The IRS imposes a 60-month waiting period before you can change classification again after an election.
If You’re a Corporation: Two Ways Out
When the S Corp is an actual corporation under state law, you need a real entity change. Which route works depends largely on your state.
Statutory Conversion
A statutory conversion transforms a corporation directly into an LLC through filings with the secretary of state. The business keeps its legal identity, so contracts, property titles, bank accounts, and liabilities carry over without separate assignment paperwork. Most states allow this, including California, Delaware, Texas, Florida, Illinois, and Ohio. Several large states do not, among them New York, New Jersey, Pennsylvania, and Arizona.
The process generally calls for a board resolution approving the conversion, a plan of conversion describing how shares translate into LLC membership units, and filing a certificate or articles of conversion together with articles of organization for the new LLC. State filing fees generally run from $25 to several hundred dollars.
The IRS has indicated it will reassign the corporation’s existing EIN to the successor LLC when the conversion happens under state law, though you should confirm this with the IRS before filing your state documents.4Internal Revenue Service. When to Get a New EIN
Statutory conversion is cleaner on the state-law side. It does not change the federal tax picture. The IRS still treats the corporation as having liquidated, and the tax consequences below still apply.
Dissolution and Reformation
In states without statutory conversion, or when you want a clean break, you dissolve the corporation and form a new LLC. More paperwork, but it works anywhere.
- The board adopts a plan of dissolution and shareholders vote to approve it. Document everything in meeting minutes.
- Send written notice to known creditors, giving them a deadline (often 120 days) to submit claims. Some states also require published notice in a local newspaper.
- File Form 966 with the IRS within 30 days of adopting the plan of dissolution.5Internal Revenue Service. About Form 966, Corporate Dissolution or Liquidation
- File articles of dissolution with your state. Skip this and the corporation stays active on state records, exposing you to ongoing franchise taxes and filing requirements.6U.S. Small Business Administration. Close or Sell Your Business
- File a final Form 1120-S covering the period from the start of the tax year through the dissolution date, with the “final return” box checked.7Internal Revenue Service. About Form 1120-S, U.S. Income Tax Return for an S Corporation
- File articles of organization for the new LLC. A handful of states also require newly formed LLCs to publish notice in a local newspaper.8Internal Revenue Service. Limited Liability Company (LLC)
- Apply for a new EIN. A new LLC formed after dissolving a corporation needs its own, and you can apply online for free.9Internal Revenue Service. Employer Identification Number
- Transfer assets on paper. Bills of sale for equipment and inventory, assignment agreements for contracts and intellectual property, new deeds for real estate. Every asset that moves needs a paper trail.
What the IRS Charges You to Leave
Statutory conversion or dissolution, the tax result is the same. The IRS treats the transition as a corporate liquidation, and liquidations create taxable events at two levels. This is where the real cost hides.
Gain at the Corporate Level
The corporation recognizes gain or loss on every asset it distributes as if it had sold those assets at fair market value.10Office of the Law Revision Counsel. 26 U.S. Code 336 – Gain or Loss Recognized on Property Distributed in Complete Liquidation Equipment originally bought for $100,000 and now worth $150,000 produces $50,000 of gain. For an S Corp, that gain passes through to shareholders on their individual returns. The same event also triggers depreciation recapture on assets written down over the years.
Gain at the Shareholder Level
Shareholders treat everything they receive in a complete liquidation as payment in exchange for their stock.11Office of the Law Revision Counsel. 26 USC 331 – Gain or Loss to Shareholders in Corporate Liquidations The difference between the fair market value of what you receive and your adjusted stock basis is a capital gain or loss. Put $50,000 in years ago, receive assets worth $300,000 now, and you have a $250,000 capital gain.
Built-in Gains Tax for Former C Corps
If the S Corp was previously a C Corp, a separate built-in gains tax may apply. It hits appreciated assets that were on the books when the S election was made, if the gain is recognized within five years of that election. The rate is 21%, applied at the corporate level before the remaining gain passes through.12Office of the Law Revision Counsel. 26 U.S. Code 1374 – Tax Imposed on Certain Built-in Gains If the company has been an S Corp since formation and was never a C Corp, this doesn’t apply.
When the Bill Is Small
Not every conversion hurts. If assets haven’t appreciated much, if shareholder stock basis is close to the value of what’s received, or if the five-year built-in gains window has closed, the tax can be modest. The painful version is a corporation that recently converted from C Corp status, holds highly appreciated real estate or intellectual property, and has shareholders with low stock basis. Get a detailed projection from a CPA before you commit.
The Ongoing Cost: Self-Employment Tax
The one-time liquidation tax gets the attention. The recurring tax change often costs more.
An S Corp owner splits income between a reasonable salary (subject to payroll taxes) and distributions (which avoid Social Security and Medicare taxes). That split can save thousands each year. Once you operate as a standard LLC taxed as a partnership, your entire distributive share of profits is generally subject to self-employment tax if you’re actively involved.
The self-employment tax rate for 2026 is 15.3%: 12.4% for Social Security on income up to $184,500, and 2.9% for Medicare on all earnings with no cap.13Social Security Administration. Contribution and Benefit Base High earners also pay an additional 0.9% Medicare surtax on income above $200,000 for single filers or $250,000 for married couples filing jointly. If your business generates $200,000 in profit beyond what you’d have paid yourself as salary, the switch to LLC could cost you roughly $15,000 or more in additional self-employment tax each year.
Deducting half the self-employment tax on the personal return offsets some of that. The math still tilts toward the S Corp for profitable businesses. If the S election was made for self-employment tax savings, make sure something has changed before you give it up.
What Doesn’t Change: The QBI Deduction
Switching to an LLC doesn’t cost you the Section 199A qualified business income deduction. Both S Corps and LLCs are pass-through entities, and the deduction (up to 20% of qualified business income) applies to both.14Internal Revenue Service. Qualified Business Income Deduction It was originally set to expire after 2025 but was made permanent by the One Big Beautiful Bill Act, signed into law in July 2025.
The deduction phases out for certain service businesses (law, accounting, consulting, medicine, and similar) when taxable income exceeds roughly $203,000 for single filers or $406,000 for married couples filing jointly. Above those thresholds the calculation gets more involved and depends on factors like W-2 wages paid and the cost basis of business property. Since your wage picture may shift under the new structure, review it with your accountant.
After the Conversion
Once the new LLC exists, your federal filing requirements track its membership. A multi-member LLC files Form 1065 as a partnership return, with income and expenses passing through to each member.15Internal Revenue Service. About Form 1065, U.S. Return of Partnership Income A single-member LLC is a disregarded entity and reports on Schedule C of the owner’s Form 1040.16Internal Revenue Service. Choosing a Business Structure
Draft an operating agreement to replace the corporate bylaws. It should cover how profits and losses are allocated, how members vote, what happens when someone leaves or sells, and how the LLC would be dissolved. Skip this and your state’s default LLC rules fill every gap, which rarely matches what the owners want.
For dissolution-and-reformation conversions, walk every contract. Leases, vendor agreements, loan documents, and client contracts may have anti-assignment clauses or change-of-control provisions that trigger default when the borrower changes. Reach out to counterparties early, because consent is easier to negotiate before the fact than after. Business licenses and permits generally don’t transfer automatically either; each issuing agency has its own rule about whether you need a new license or a name update.
Most states require LLCs to file annual or biennial reports, with fees ranging from nothing to several hundred dollars. Many also impose franchise taxes or gross receipts taxes regardless of federal classification. Miss those and the state can administratively dissolve the LLC, undoing the work. And with no employer withholding from your draws, estimated quarterly payments matter more than they did when you were on payroll as an S Corp.