Changing your business structure is a big decision. For many S Corp owners, converting to an LLC can offer more flexibility, fewer compliance requirements, and simplified management. The transition can affect everything from taxes to legal protections, so it’s important to understand the process before making a move.

Every state has different rules for how (or if) an S Corp can be converted into an LLC. There are also tax considerations—such as potential capital gains implications or changes in self-employment taxes—that business owners should evaluate. All that said, with the right approach, converting an S Corp to an LLC doesn’t need to be difficult—and it could provide some great long-term benefits. 

Why Convert an S Corp to an LLC?

Converting an S Corp to an LLC can offer business owners greater flexibility and fewer regulatory burdens. While S Corps provide tax advantages and liability protection, they also come with strict compliance requirements, such as shareholder limits, ownership restrictions, and mandatory board meetings. An LLC, on the other hand, allows for a more adaptable management structure, making it easier to operate without the need for formal corporate procedures.

Tax considerations are another key factor in this transition. While both S Corps and LLCs offer pass-through taxation, LLCs don’t require owners to take a salary or handle payroll taxes in the same way S Corps do. Plus, an LLC can have an unlimited number of owners, including corporate entities, making it a more flexible choice for businesses planning for growth or restructuring. 

Key Considerations Before Converting

Before converting an S Corp to an LLC, it’s essential to evaluate the legal, financial, and tax implications of the transition. Here are some key factors to consider before making the switch:

  • State Regulations. Some states allow a statutory conversion for a direct transition, while others require dissolution and reformation—meaning the S Corp must be closed and a new LLC formed.
  • Tax Implications. Converting may trigger capital gains taxes if assets need to be reallocated. Additionally, shifting from an S Corp to an LLC could change how self-employment taxes apply.
  • Liability Protection. Ensure that the LLC will maintain the same level of legal protection as the S Corp, especially if the business has existing contracts or liabilities.
  • Ownership & Management. An LLC offers more flexibility in ownership structure, but it’s important to establish a clear operating agreement to define roles, responsibilities, and decision-making processes.
  • Business Licenses & Contracts. Any permits, bank accounts, or agreements associated with the S Corp may need to be updated or transferred under the new LLC.

Carefully evaluating these factors can help prevent unexpected challenges during the transition. Taking the time to consult with legal and financial professionals ensures the process goes smoothly.

How to Convert an S Corp to an LLC (6 Steps)

The process of converting an S Corp to an LLC depends on state regulations, with some states allowing a statutory conversion (a direct transition) while others require dissolution and reformation, meaning the S Corp must be legally closed before forming a new LLC. After that, it’s a matter of registering the business’ updated information and closing any liability loopholes.

1. Review Your State’s Conversion Rules

The first step is to check with your state’s business filing office (usually the Secretary of State) to determine the specific requirements for converting an S Corp to an LLC. If your state allows statutory conversion, the process is generally straightforward and involves submitting the necessary paperwork. However, if statutory conversion isn’t permitted, you’ll need to follow a dissolution and reformation process and establish a new LLC.

2. File the Necessary Paperwork

If your state allows statutory conversion, you’ll submit a Certificate of Conversion with the Articles of Organization for the LLC. This process legally transforms the business while maintaining continuity. 

If statutory conversion isn’t an option, you must first file Articles of Dissolution to officially close the S Corp. Once the dissolution is complete, you can then file the Articles of Organization to establish the new LLC. In either case, be sure to follow your state’s filing requirements, including any fees or additional documentation.

3. Obtain a New EIN (If Required)

In some cases, the IRS may require your business to obtain a new EIN when converting to an LLC. Whether you need a new EIN depends on how the transition is structured—some businesses can retain their existing EIN, while others must apply for a new one. If a new EIN is required, it can be obtained quickly by applying online through the IRS website.

4. Update Business Licenses and Permits

Once the new LLC is legally formed, all existing business licenses, permits, and tax registrations must be updated. Depending on the industry and location, this may involve notifying state agencies, reapplying for permits, or transferring regulatory approvals. Failure to update these records could result in compliance issues or disruptions to business operations.

5. Transfer Business Assets and Contracts

If your S Corp held assets such as real estate, vehicles, or intellectual property, these must be formally retitled or reassigned under the new LLC’s name. Additionally, contracts with vendors, clients, and service providers should be reviewed and updated to reflect the LLC as the legal business entity. In some cases, financial institutions may require new banking agreements or updated documentation for loans and business accounts. 

6. Adjust Your Tax Filings and Compliance

Converting an S Corp to an LLC also affects tax filings, so it’s important to close out the S Corp properly. A final S Corp tax return must be filed with the IRS and state tax authorities to document the business transition. 

Going forward, LLCs are taxed differently, and owners should decide whether to maintain pass-through taxation or elect S Corp tax status if it aligns better with financial goals. Payroll and accounting systems may also need to be adjusted to reflect the new entity type, ensuring compliance with tax regulations.

4 Common Mistakes to Avoid

Converting an S Corp to an LLC requires careful planning, and overlooking key steps can lead to unnecessary complications. From unexpected tax liabilities to legal missteps, even small errors can create delays or financial setbacks. Being aware of the most common mistakes can help ensure a smooth transition:

  1. Not consulting a tax professional. The conversion process can have tax implications, including potential capital gains taxes on transferred assets. Without proper planning, business owners may face unexpected tax burdens that could have been avoided with strategic guidance.
  2. Ignoring state-specific regulations. Every state has its own rules regarding S Corp conversions. Some allow statutory conversions, while others require dissolution and reformation. Failing to follow the correct legal steps could result in compliance issues or additional fees.
  3. Forgetting to update information. Once the LLC is formed, all agreements, vendor contracts, financial accounts, and tax registrations must reflect the new business structure. Overlooking key details can create operational headaches, especially if clients or vendors continue using outdated information.
  4. Failing to establish a clear operating agreement. While LLCs offer management flexibility, having a structured operating agreement is essential for defining ownership roles, profit distribution, and decision-making processes. Without one, disputes or misunderstandings among business partners can arise.

Taking the time to research state regulations and update business records will help protect the company’s financial health and stability.

North One Helps You Stay Financially Organized

Managing business finances efficiently is crucial—whether you’re operating as an S Corp or an LLC. Converting to a new structure means updating accounts, tracking expenses, and maintaining compliance with tax obligations. North One simplifies this process with automated expense tracking, accounting integrations, and dedicated business banking solutions that keep financial records organized both during and after the transition.

With North One, business owners can separate personal and business finances and streamline tax preparation from a single, easy-to-use platform. Whether maintaining an S Corp or transitioning to an LLC, North One provides the tools to manage your finances smoothly. 

A Smarter Path for Your Business: Convert S Corp to LLC

Converting an S Corp to an LLC can provide greater flexibility, fewer compliance requirements, and a more streamlined management structure. However, the process involves legal and tax considerations, including state-specific requirements and necessary updates to business licenses and contracts. 

With the right preparation and financial tools, transitioning to an LLC doesn’t have to be complicated. North One makes business banking simple, helping S Corps and LLCs manage expenses and stay organized. Open an account today and keep your business finances running smoothly, no matter your structure.