As your small business grows, it’s only natural to reevaluate your structure—especially when it comes to taxes. One of the most common questions we get is whether they should convert their LLC to an S Corporation.
The answer? It depends on your business goals, income, and how you want to handle taxes moving forward.
Let’s walk through the basics of how and why you might want to make the switch, and what it could mean for your bottom line.
LLC vs. S Corp: What’s the Difference?
Limited Liability Companies (LLCs) are one of the most popular business entities for a reason. They offer liability protection, a simple setup, and flexible tax treatment. By default, an LLC is treated as a pass-through entity, meaning the business doesn’t pay corporate taxes—income flows directly to the owner’s personal tax return.
An S Corporation (S Corp) is not actually a separate business structure but a tax election made with the IRS. When your LLC elects to be taxed as an S Corp, you keep the legal protections of the LLC, but you change how the business income is taxed.
Why Would You Switch an LLC to an S Corp?
The main reason? Tax savings—specifically, on self-employment taxes.
With a standard LLC, all your business profits are subject to self-employment tax (Social Security and Medicare), which is about 15.3%. But with an S Corp, you can split income into two categories:
- A reasonable salary (subject to payroll and self-employment taxes)
- Distributions (not subject to self-employment taxes)
This allows you to lower your overall tax liability—as long as your business is earning enough to justify the added complexity.
Pros of Switching to an S Corp
- Reduced Self-Employment Taxes
You only pay employment taxes on your salary—not the entire profit of the business. - Pass-Through Taxation
Like an LLC, S Corps avoid double taxation. Income passes through to the owners’ individual returns. - Build Credibility with Payroll
Paying yourself as a W-2 employee can look more professional and make it easier to qualify for personal loans or mortgages.
Cons to Consider
✘ More Administrative Requirements
You’ll need to run payroll, file quarterly payroll reports, and comply with stricter IRS guidelines.
✘ Reasonable Salary Rule
You’re required to pay yourself a “reasonable salary,” which must be backed by industry standards and IRS justification.
✘ Added Costs
You’ll likely need professional payroll services and tax support..
When Does It Make Sense to Switch?
There’s no magic number, but many accountants suggest considering the switch once your business earns around $50,000–$75,000 in annual net income.
Why? That’s typically the income range where the self-employment tax savings outweigh the added costs of payroll and S Corp compliance.
But again—every business is different. If you have multiple owners, complex finances, or inconsistent income, it’s worth getting a customized analysis.
How to Convert an LLC to an S Corp
If you’re ready to make the move, here’s a simplified breakdown:
- Ensure You’re Eligible
- You must be a domestic business
- You can have no more than 100 shareholders (individuals, not other companies)
- You can only have one class of stock
- File Form 2553 with the IRS
This is the form that officially elects S Corp status. It’s best to file early in the year (by March 15) to have it apply for the current tax year. - Set Up Payroll for Yourself
You’ll need to start paying yourself a reasonable salary through payroll and withholding taxes accordingly. - Update Your Accounting and Compliance Processes
S Corps require more formal bookkeeping, payroll filings, and separate owner/shareholder distributions.
Need help? That’s where we come in.
Work with Huddleston Tax CPAs
At Huddleston Tax CPAs, we help small business owners across Washington and beyond evaluate whether an S Corp election makes sense for their unique financial picture.
We’ll help you:
- ✅ Run the numbers
- ✅ File IRS Form 2553
- ✅ Set up compliant payroll
- ✅ Maximize tax savings and stay in good standing
Thinking about switching from an LLC to an S Corp?
Schedule a consultation with Huddleston Tax CPAs today and find out if the move makes sense for your business.