To change an S Corp to an LLC, you first need to figure out what kind of entity you actually have, because “S Corp” is a tax status rather than a business type. If your business is a state-law corporation that elected S-Corp treatment, you convert the entity itself with the state and then decide separately whether to keep or drop the S-Corp tax election with the IRS. If your business is already an LLC that elected S-Corp taxation, there is no entity to convert; you only revoke the tax election. In both paths, the paperwork is manageable and the tax consequences are where the money is.
Figure Out Which Situation You’re In
An S-Corp is created when an eligible entity files Form 2553 with the IRS to elect S-Corp taxation.1Internal Revenue Service. About Form 2553, Election by a Small Business Corporation That eligible entity is either a corporation or an LLC. Which one you have determines what the conversion actually involves.
If the underlying entity is a corporation, you have two separate decisions. The first is a state filing that changes the legal entity from a corporation to an LLC. The second is a federal choice about the S-Corp tax election. These do not have to move together. An LLC is itself eligible to elect S-Corp taxation, so some owners convert the entity for operational flexibility and keep the S election for its payroll-tax treatment. If you want the LLC taxed under its default rules instead, you also revoke the election.
If the underlying entity is already an LLC that elected S-Corp status, skip the state conversion entirely. Revoking the election drops the LLC back to its default classification: partnership for multi-member LLCs, disregarded entity (taxed like a sole proprietorship) for single-member LLCs.2Internal Revenue Service. Limited Liability Company – Possible Repercussions
Converting a Corporation to an LLC
Start with internal approval. The board of directors adopts a plan of conversion, and shareholders holding more than half the shares must consent. Federal law uses that same majority threshold for revoking an S election,3Office of the Law Revision Counsel. 26 USC 1362 – Election; Revocation; Termination but your state’s corporate code or your own bylaws may require more. Check both before scheduling the vote.
Most states offer a streamlined route called statutory conversion. You file articles of conversion with the secretary of state, and the corporation legally becomes an LLC without dissolving. The entity is treated as continuous, which preserves contracts, licenses, and the existing EIN. Filing fees typically run a few hundred dollars but vary by state. A certificate of good standing for the corporation is often required before the state will process the filing.
If your state does not offer statutory conversion, the alternative is longer: dissolve the corporation, file articles of organization for a new LLC, and transfer all assets, contracts, and liabilities over. This route can trip anti-assignment clauses in leases and vendor contracts, and it requires a new EIN. When a corporation dissolves, you must also file Form 966 with the IRS within 30 days of adopting the dissolution plan.4Internal Revenue Service. Form 966 – Corporate Dissolution or Liquidation Statutory conversion is strongly preferable when it’s available.
Revoking the S-Corp Tax Election
If you want the business taxed under default LLC 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, with written consent from shareholders holding more than half the outstanding shares.3Office of the Law Revision Counsel. 26 USC 1362 – Election; Revocation; Termination
Timing is strict. 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 of that year. For a calendar-year business, the cutoff is March 15. File after that and the revocation applies to the following tax year unless you name a specific future effective date.5Internal Revenue Service. Revoking a Subchapter S Election Line up the revocation date with the state entity conversion so you don’t end up with the entity changed and the tax status still pending, or the opposite.
One trap: if the business was originally a C-Corp before it elected S status, revoking the S election by itself puts the entity back to C-Corp taxation, not partnership or disregarded-entity status. To reach default LLC treatment you also need to complete the entity conversion to an LLC. An LLC that elected S-Corp treatment doesn’t have that problem; revocation drops it to its default classification based on member count.2Internal Revenue Service. Limited Liability Company – Possible Repercussions
The One-Time Tax Hit
The paperwork is cheap. The taxes can be expensive, and the risk concentrates when the underlying entity is a corporation rather than an already-formed LLC.
Deemed Liquidation
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. This deemed liquidation flows from Treasury Regulation 301.7701-3(g). Nothing physically moves, but if the fair market value of the business’s assets exceeds the shareholders’ tax basis in their stock, the difference is capital gain at the shareholder level.
For a business that was always an S-Corp, the gain is taxed only once, at the shareholder level. That is better than converting a C-Corp to an LLC, which can produce tax at both the corporate and shareholder levels. Even so, appreciated real estate, equipment, or intellectual property can generate a real bill.
Built-In Gains Tax
If the S-Corp came from a C-Corp, a corporate-level built-in gains tax under Section 1374 may also apply. It targets appreciation that existed when the company switched from C to S. 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 recognition period was made permanent by the PATH Act in 2015. A deemed liquidation counts as a disposition, so where you sit in that five-year window matters.
Accumulated Earnings and Profits
An S-Corp with prior C-Corp years may be carrying accumulated earnings and profits from that earlier period. Normal S-Corp distributions come out tax-free up to the shareholder’s stock basis, but C-Corp-era earnings and profits distributed in a conversion can be taxed as ordinary dividend income instead of capital gains. If the business has any C-Corp history, have an accountant quantify this before you file anything.
Basis Step-Up Going Forward
After the deemed liquidation, the assets inside the new LLC take a fresh tax basis equal to their fair market value at conversion. For appreciated assets that step-up reduces future tax when the LLC eventually sells them. For assets that have declined, basis steps down. You pay now for a higher starting basis later.
The Ongoing Cost: Self-Employment Tax
This is the part that catches people after the conversion is done. Under S-Corp treatment, only the reasonable salary paid to an owner-employee is subject to Social Security and Medicare taxes. Profits distributed on top of that salary are not.7Internal Revenue Service. S Corporation Employees, Shareholders and Corporate Officers That split is the main reason small businesses elect S-Corp status in the first place.
Drop the election, and all net earnings of the LLC become subject to self-employment tax. The combined rate is 15.3% (12.4% Social Security plus 2.9% Medicare), with the Social Security portion applying to earnings up to $184,500 in 2026.8Social Security Administration. Contribution and Benefit Base Medicare has no cap, and an additional 0.9% Medicare surtax applies above $200,000 for single filers and $250,000 for married filing jointly.
A quick example. A business nets $150,000 and the owner has been drawing a $70,000 salary under S-Corp treatment. Employment taxes applied to $70,000. As a default LLC, self-employment tax would apply to all $150,000. The annual difference can easily land between $8,000 and $12,000, more at higher income levels. If the only reason you want the switch is operational flexibility, converting the entity to an LLC and keeping the S-Corp tax election often makes more sense than giving the election up.
EIN, Contracts, and Records
A statutory conversion preserves the entity, so you keep the same EIN. If instead you dissolve the corporation and form a new LLC, the IRS treats that as one entity ending and another starting, and you need a new EIN. A new EIN cascades into every bank account, credit line, payroll system, and tax registration you have.9Internal Revenue Service. When to Get a New EIN
Even with a statutory conversion, review every significant contract before you file. Commercial leases and financing agreements often include anti-assignment clauses that treat an entity-type change as a default. The contract language controls, so get written consent from landlords and lenders where the agreement calls for it. Business licenses at the local, state, and federal level also need attention; some jurisdictions want a new application when the entity type changes, others accept an amendment.
If you are also dropping the S election, payroll setup changes meaningfully. Under S-Corp treatment, health insurance premiums paid for a more-than-2% shareholder-employee are reported as W-2 wages but are exempt from FICA and FUTA, and the shareholder deducts them on their personal return.10Internal Revenue Service. S Corporation Compensation and Medical Insurance Issues As a default LLC, the deduction mechanics shift over to the self-employed health insurance deduction, with different eligibility rules.
Finally, give the new LLC an operating agreement, even if there is only one member. It governs ownership percentages, profit distribution, voting rights, and what happens when a member leaves, and courts look at it when deciding whether the LLC’s liability shield holds up. If the corporation had bylaws and a shareholder agreement, expect to rework much of that content into LLC-appropriate terms rather than carry it across unchanged.