As business needs evolve, the structure of your entity may need to change as well. Many business owners operating as an S-Corporation consider switching to a Single-Member LLC or Partnership to simplify operations, adapt to changing goals, or reduce administrative burdens.

This blog explores the process of transitioning from an S-Corp to a Single-Member LLC or Partnership, the pros and cons of each, and the steps required to make this switch correctly.

Why Consider Changing Entity Structure?

The decision to switch from an S-Corp to a Single-Member LLC or Partnership often arises due to:

1. Low Revenue or Activity: Maintaining an S-Corp may no longer justify the administrative costs and complexity.
2. Simplified Taxation: LLCs and partnerships often have fewer compliance requirements.
3. Business Changes: A different structure might better align with your operational or personal goals.

How to Transition from S-Corp to LLC or Partnership

1. Revoke the S-Corp Election Using Form 8832
   • File IRS Form 8832 to change the tax classification of the entity back to the default structure for an LLC:
     • Single-Member LLC: Treated as a disregarded entity for tax purposes.
     • Multi-Member LLC: Treated as a partnership.
   • No dissolution is required—this approach simply changes how the business is taxed.
2. Adjust Operations Post-Change
   • If transitioning to a Single-Member LLC, stop running payroll for the owner, as income will now be reported on Schedule C.
   • For a partnership, establish a partnership agreement and begin filing Form 1065 annually.
3. Close the S-Corp Only If Necessary
   • If a complete restart is preferred, the S-Corp can be dissolved at the state level.
   • File a final S-Corp tax return (Form 1120-S) to close the entity with the IRS.

Pros and Cons of Switching to a Single-Member LLC

Pros

✅ Simplified Taxation
Income is reported directly on the owner’s personal tax return (Schedule C), eliminating the need for separate corporate tax filings.

✅ Lower Administrative Costs
No more payroll filings, officer designations, or formalities required for S-Corps.

✅ Flexible Operation
Easier to manage without the need for strict compliance rules.

Cons

❌ Self-Employment Tax
The entire income is subject to self-employment tax, unlike S-Corps, where distributions can reduce this liability.

❌ No Separation of Ownership and Employment
You lose the ability to strategically allocate income between salary and dividends.

Pros and Cons of Switching to a Partnership

Pros

✅ Pass-Through Taxation
Similar to an S-Corp, income passes through to the partners’ personal tax returns, avoiding double taxation.

✅ Flexible Ownership Structure
Partnerships allow for dynamic allocation of profits and losses.

✅ Simpler Compliance
Fewer corporate formalities compared to S-Corps, like officer roles and shareholder meetings.

Cons

❌ Self-Employment Tax
Partners’ income is subject to self-employment tax unless they are passive partners.

❌ Joint Liability
General partners share liability for the business’s debts unless structured as an LLC Partnership.

❌ Additional Reporting Requirements
Partnerships must file an annual partnership return (Form 1065) and issue K-1s to partners.

FAQs About Switching from S-Corp to LLC or Partnership

1. Do I need to dissolve my S-Corp to switch to an LLC or Partnership?
   No, you can file Form 8832 to change the tax classification without dissolving the entity. Dissolution is only necessary if you want to close the S-Corp entirely and start fresh.
2. What are the tax implications of switching to a Single-Member LLC?
   A Single-Member LLC is taxed as a disregarded entity, with all income reported on Schedule C and subject to self-employment tax.
3. Can I keep my EIN when switching?
   Yes, if you are not dissolving the entity, the EIN remains the same after filing Form 8832 to change the tax classification.
4. What happens to S-Corp retained earnings?
   Any retained earnings are distributed and taxed accordingly when the S-Corp election is revoked.
5. What is the deadline to file Form 8832?
   To change the classification effective January 1 of the following year, file Form 8832 no later than 75 days into the year (e.g., March 15 for a January 1 effective date).

Switching from an S-Corp to a Single-Member LLC or Partnership can simplify operations and reduce administrative costs. However, it’s crucial to evaluate the tax and legal implications. For professional guidance tailored to your business, contact Zenith Tax & Accounting LLC today!