How to Switch from an LLC to an S Corp
Thinking about electing S-Corp status for your LLC? You’re not alone. Many Texas owners reach the point where self-employment taxes start to bite, payroll needs to grow, or they want a more predictable compensation structure.
Below, we explain LLC vs. S Corp, when switching makes sense, and the exact steps to make the election. We'll look at this through the lens of a Texas business owner, plus provide a Texas-specific checklist to keep you compliant.
Prefer to talk it through? Schedule a free consultation with David Hecht, CPA—we’ll run the numbers, check eligibility, and file the election for you.
LLC vs. S-Corp: What’s the Difference?
LLC
A legal entity formed under state law.
By default, a single-member LLC is taxed as a sole proprietorship; a multi-member LLC is taxed as a partnership.
Profits generally pass through to owners and are subject to self-employment (SE) tax.
S-Corporation (S-Corp)
Not a new legal entity—it’s a federal tax election for an eligible domestic corporation (including an LLC that elects to be taxed as a corporation).
Profits pass through to owners, but only wages paid to owner-employees are subject to payroll taxes; the remaining profit distributions are not subject to SE tax.
Requires reasonable compensation (payroll) to owner-employees and ongoing payroll compliance.
What it means in practice
To convert your LLC to S Corp usually means your LLC keeps operating under Texas law, but you elect S-Corp tax treatment with the IRS and start running payroll.
Can You Make The Switch from an LLC to an S-Corp?
Short answer: Yes. Most Texas LLCs can elect to be taxed as an S-corporation if they meet IRS eligibility rules and make a timely election. Your legal entity stays an LLC under Texas law; you’re changing only your federal tax classification and launching payroll for owner-employees.
Eligibility—Quick Checklist
You’re likely eligible if all are true:
Your company is a domestic entity (your Texas LLC qualifies).
Shareholders (members) are eligible individuals, certain estates, or qualifying trusts.
No partnerships, corporations, or non-resident alien owners.
Certain trusts (grantor trust, QSST, or ESBT) can qualify with the right elections.
You have one class of equity (same distribution and liquidation rights for all owners). Voting differences are okay.
All owners consent to the election, and you agree to pay reasonable compensation (via payroll) to any owner who works in the business.
Unsure about one class of equity? We’ll review your operating agreement for preferred returns, special allocations, or convertible notes that could accidentally create a second class of stock.
Common Owner Scenarios
Single-Member LLC: Can usually file Form 2553 directly. We’ll confirm whether Form 8832 is needed first based on your current tax classification.
Husband-and-Wife LLC (Texas is community-property): Typically eligible; both spouses must consent. Counting rules for the 100-shareholder limit are favorable, but each spouse still needs to be an eligible shareholder.
Multi-Member LLC (all individuals): Often eligible once the operating agreement reflects a single class of equity and all members sign.
Entity or Foreign Owners: If any member is a partnership, corporation, or non-resident alien, you’ll need to restructure ownership before electing S-Corp status.
Trust Owners: Possible with QSST or ESBT elections coordinated alongside Form 2553.
Timing and Deadlines
Standard deadline: Within 2 months and 15 days of the start of the tax year you want S-Corp treatment (e.g., by March 15 for a calendar-year company).
Late election relief: Often available if you can show reasonable cause (we prepare the relief statement and required attachments).
Mid-year switches: Possible. You’ll either file short-period returns or make a “closing-of-the-books” election to split income and expenses between pre- and post-election periods.
What Changes Day-to-Day?
Payroll starts: Owner-employees must receive reasonable W-2 wages. We benchmark pay using market data and your role/time in the business.
Distributions vs. Wages: After wages, additional profit may be taken as distributions (generally not subject to self-employment tax).
Bookkeeping: Track owner basis, wages, distributions, and >2% shareholder health-insurance correctly (Box 1 W-2 reporting rules apply).
Texas: You’ll continue filing Texas Franchise (margin) tax—the S-election doesn’t remove state obligations.
Red Flags That Can Block (or Undo) an Election
A member who is an ineligible owner (entity, non-resident alien).
Multiple economic classes (preferred returns, liquidation preferences, profit-only interests).
Convertible notes/warrants drafted in a way that creates a second class of stock (some straight-debt terms are okay; we’ll review).
Paying no or below-market owner wages after the election.
Missing the filing window without requesting late relief.
Paperwork at a Glance
Form 2553 (S-Corporation Election) – signed by all owners.
Form 8832 (if needed) – to first elect corporate treatment for an LLC before 2553.
QSST/ESBT elections (if any trust owners).
Payroll registrations and setup (IRS/TWC accounts, payroll schedule, officer comp policy).
Not sure if you should switch?
We’ll model LLC vs. S-Corp cash flow (reasonable salary, payroll costs, QBI impact, health-insurance treatment, retirement plan options) and give you a clear yes/no with an estimated after-tax savings figure.
Book a free consultation with David Hecht, CPA. We’ll confirm eligibility, prepare and file the election, and launch payroll correctly—so you can focus on running the business.
When Does Switching to an S-Corp Make Sense?
Bottom line: An S-Corp can make sense once your business consistently earns more than a reasonable salary for your role, so there’s meaningful profit left to take as distributions after payroll. That’s where potential self-employment tax savings come from.
A simple way to think about it
Estimate a reasonable salary for the work you actually do (market pay for your duties, time, and skill level).
Project annual profit before owner pay.
Distributable profit = Profit − Reasonable Salary.
Rough tax savings = about 15% of the distributable profit (up to the Social Security wage base) and ≈3% above that.*
Subtract added costs (payroll, quarterly filings, year-end W-2s, CPA fees, bookkeeping time). If the result is still meaningful, the S-Corp is worth a closer look.
*Savings are from avoiding self-employment tax on distributions; exact rates and wage bases change annually and your situation may vary (e.g., Additional Medicare tax at higher incomes).
Typical break-even ranges we see
If your added annual admin cost is $3k–$5k, you generally want at least $25k–$40k of distributions (profit left after salary) to come out ahead.
Strong candidates often show $60k+ of distributions each year, or a clear path to that within the next 12 months.
We’ll model this precisely for you—salary benchmarks, payroll cost, QBI impact, and expected after-tax savings.
Situations where an S-Corp often helps
High-margin service businesses (consulting, creative, trades, professional services) where owner labor is primary and profits exceed a reasonable wage.
Growing teams where you want a clean split between W-2 wages and owner distributions for planning, retirement contributions, and benefits.
Owners funding retirement (Solo 401(k)/SIMPLE/SEP): predictable W-2 wages can make plan design and contributions easier.
Family-employed owners who want to add legitimate W-2 wages for a spouse or older children doing real work (withholdings/benefits handled correctly).
Situations where it may not be a fit (yet)
Inconsistent or thin profits (your reasonable salary would consume most of the profit).
Early-stage or loss years (no SE tax savings to capture).
Ineligible owners (entity owners, non-resident aliens) or equity terms that create more than one class of stock.
You won’t run payroll or you’re unwilling to document reasonable compensation.
Don’t forget these planning factors
Reasonable compensation: The IRS expects it before distributions.
QBI (199A) deduction: Still available for many S-Corp owners, but wages are not QBI. We’ll check how salary level interacts with QBI limits, especially for specified service trades.
Health insurance for >2% owners: Handled through payroll/W-2 reporting—done right, it’s usually deductible to the business and taxable to the owner.
Texas angle: No state personal income tax, but you’ll still file Texas Franchise (margin) tax and TWC payroll items on owner wages.
Audit posture: Clean books, clear officer-wage policy, and basis tracking reduce risk.
Quick “60-Second” Self-Check
A. Reasonable salary for me: $____
B. Expected profit (before owner pay): $____
C. Distributable profit (B − A): $____
D. Estimate savings (~15% of C, up to SS cap): $____
E. Extra admin costs (payroll + CPA): $____
If D − E is comfortably positive, and profits are consistent, S-Corp is likely worth pursuing.
Deadline: When to File the S-Election
For a calendar-year company, file by March 15 to be effective for the current year (or within 2 months and 15 days of the start of your tax year or formation date). Missed it? You may still qualify for late-election relief—ask us to review.
How to Switch from an LLC to an S Corp (Step-by-Step)
Confirm eligibility (owners, classes of equity, residency).
Run the numbers (salary benchmark, payroll costs, potential tax savings, QBI implications).
Choose an effective date (current year vs. next year; consider cash flow and payroll timing).
Elect corporate tax classification for your LLC if needed.
Many LLCs can go straight to S-Corp using Form 2553; others first file Form 8832 to be taxed as a corporation, then 2553. We’ll determine the cleanest route.
File IRS Form 2553 (“Election by a Small Business Corporation”)—signed by all owners.
Set up payroll and start paying reasonable compensation to owner-employees.
Update bookkeeping (track shareholder basis, officer wages, distributions, and health insurance for >2% shareholders).
Adjust benefits & retirement (Solo 401(k)/SIMPLE/SEP considerations, HSA, accountable plan for reimbursing expenses).
Texas compliance (see checklist below) and quarterly payroll filings (Forms 941, state unemployment).
We handle steps 2–9 for clients, including salary studies, filings, and a clean payroll launch.
Texas-Specific S-Corp Checklist
Texas Franchise Tax: You’ll still file the franchise (margin) tax return—entity classification for federal purposes doesn’t eliminate Texas filing.
Texas Workforce Commission (TWC): Register or update your state unemployment account for payroll.
Workers’ comp: Not required for most Texas employers, but evaluate risk and contracts.
Local filings: Verify any city/county permits or business personal property renditions are up to date.
Banking & bookkeeping: Keep owner wages and distributions clearly separate.
EIN: Many LLCs keep the same EIN when electing S-Corp status; confirm based on your structure and filing path.
Common Mistakes When Switching from LLC to S-Corp
No (or low) owner salary. The IRS expects reasonable compensation before distributions.
Late Form 2553. Missing the deadline without documenting relief can jeopardize the election.
Ignoring payroll details. Unreported health insurance for >2% shareholders, missed payroll deposits, or W-2 errors create penalties.
Poor basis tracking. Distributions without basis can be taxable.
Wrong effective date. Mid-year switches without clean cutoff bookkeeping cause headaches.
Not updating the operating agreement. Align provisions with single class-of-stock and S-Corp requirements.
Quick FAQ: How to Switch from LLC to S-Corp
Can you switch from an LLC to an S-Corp mid-year?
Often yes, if you meet the 2 months + 15 days timing rule for the chosen effective date, or you qualify for late-election relief. We’ll review your books to make the mid-year cutoff clean.
Do I need to form a new corporation with the Texas Secretary of State?
Usually no. Your LLC can remain an LLC under Texas law while electing S-Corp tax status federally. (We’ll confirm based on your structure.)
Will I still qualify for the 199A/QBI deduction?
Often yes, but owner wages are not QBI. Only the pass-through share may qualify and is subject to wage/UBIA limits by industry and income level. We’ll model this for you.
What salary should I pay myself?
It must be reasonable for your role, skills, time, and market.
Is switching worth it for my business?
It depends on consistent profit, salary needs, and payroll/administrative costs. We’ll provide a break-even analysis before you switch.
Your Next Step: Talk With a Fort Worth CPA Who Knows Texas Businesses
It can be hard to decide if year-end tax planning or an entity change is the right move, especially when you’re juggling growth, hiring, and cash flow. We listen first, then deliver a clear, numbers-driven recommendation.
Free consultation with David Hecht, CPA
Personalized LLC vs. S-Corp savings analysis
Filing Form 2553 (and 8832 if needed)
Clean payroll launch and Texas tax return compliance checklist
Ready to see if switching from LLC to S-Corp makes sense? Schedule your free consultation, and we’ll take it from there.