Learn the essential steps to convert an LLC to a C corporation.
If you’re wondering what it takes to convert an LLC to a C corporation, you’re not alone. It’s a pretty complex process. But exactly how complex that process is largely depends on what state you’re converting a business in.
In this guide, we’ll walk you through all the basics of converting your LLC into a corporation, including the best methods for conversion, the tax consequences of converting, and more.
An LLC, or limited liability company, is a popular choice for brand-new entrepreneurs because it’s a flexible business entity that still offers limited liability protection. Like a sole proprietorship, it’s relatively easy to run — even as a sole owner of a business — especially compared to a corporation.
Brand-new businesses can start out as a corporation right away if they want. But many businesses “start small,” perhaps as a single-member LLC and then transition into a corporate structure once they’ve grown into a larger business. When an LLC converts into a corporation, they’ll have to fulfill a corporation’s strict requirements in their state. They’ll also be subject to double taxation, too (more on this later).
Every corporation must fulfill quite a few duties, including an annual report to the state (like LLCs often do). But there are lots of other formalities, too. Corporations have to appoint a board of directors, write and adhere to corporate bylaws, and have regular shareholder meetings and board meetings. They’re also expected to provide regular reports for their shareholders and make distributions on a regular basis.
Falling short on these requirements or failing to follow the corporate bylaws can spell disaster for a corporation. LLCs are much simpler by comparison.
At first glance, it might seem foolish to trade an LLC’s simplicity for a corporation’s red tape and double taxation. But there can be some disadvantages to the LLC, too. One of the biggest disadvantages of an LLC is that it’s harder to raise capital since it can’t offer stock. Potential investors also tend to be more likely to invest in corporations, too.
If you have goals that require lots of capital or you want to make a public offering of stock someday, then you’ll definitely want to transition to a corporation. You might also consider converting if your tax burden would be smaller as a corporation. If you want to expand your business to other countries, you’ll need to convert to a corporation because LLCs aren’t recognized outside of the U.S.
We highly recommend consulting with a tax professional to learn if that would be true for your business.
An LLC is considered a pass-through entity for federal tax purposes. That means the LLC itself doesn’t pay any federal income taxes by default. Instead, the tax burden “passes through” to the business owners, and they pay individual income taxes on their personal tax returns. For some businesses, that results in a lower tax burden — but not always.
Converting into a C corporation means that the former LLC will be subject to double taxation: the corporation will pay corporate income taxes on its own tax return and then its shareholders will pay personal income taxes when they receive their share of the profits. At first, that tax treatment sounds like a big drawback. And for some businesses, it is. But other tax benefits like lower self-employment taxes and deductions only available to corporations may balance out the tax burden.
If you’re unsure about how substantially your tax burden will change by converting, we recommend chatting with a licensed tax advisor or business attorney.
Every corporation is, by default, a C corporation. However, certain qualifying C corporations — and LLCs — can elect to become an S corporation. An S corporation is a tax status, not a business structure. To qualify to be an S corporation, a domestic business must have fewer than 100 shareholders (or members) that are natural persons, have only one class of shares, and meet a few other requirements. If a corporation has preferred shares or thousands of individual shareholders, it can’t elect S corporation status.
By electing S corporation tax status, a business can avoid double taxation while still enjoying some of the tax breaks exclusive to corporations. Read more in our S Corp vs. C Corp guide.
There are actually several different types of conversions you can use to convert your LLC into a corporation. Each conversion process has unique procedures and costs, though. If you’re not sure which method is right for you, we recommend consulting with a business lawyer in your state.
A statutory conversion is by far the easiest method to convert an LLC into a corporation. It’s often the cheapest, too; typically you’ll only have a filing fee for one form. The drawback: it’s not available in every state.
In the states that do offer statutory conversions, the process entails voting to convert in accordance with the LLC’s operating agreement. After that, the LLC can file a form that’s usually called the Articles of Conversion (or Certificate of Conversion in some states). This form automatically converts the LLC into a corporation, transforms the owners’ membership rights into stock, transfers over all the LLC’s assets and liabilities, and ends the LLC.
If your state doesn’t offer a statutory conversion option, then your next best choice is probably a statutory merger. It’s a bit more complicated than a statutory conversion. First, you’ll need to vote to convert and create a plan of conversion for the process. Then you’ll have to create a brand-new corporation (so if you’ve been considering a name change, now’s a good opportunity to pick a new one).
Once both entities exist, you can file a Certificate of Merger (the exact title varies by state). This form automatically transfers the assets and liabilities of the LLC, the disappearing entity, to the corporation, the surviving entity. The members automatically become corporate shareholders in the new corporation. After the merger paperwork is completed and approved, the LLC should file its Articles of Dissolution.
A non-statutory conversion is the most complicated way to convert your LLC, and if you go this route, you must enlist the help of an attorney. That’s because instead of filing paperwork with the Secretary of State to transfer your assets and liabilities over, you’ll create legal agreements that transfer them instead. The conversion costs are usually higher, too.
Like any conversion, you’ll start by voting to convert and then drafting a plan of conversion. You’ll also need to create a new corporation. Then a business attorney can help you create formal agreements and contracts that transfer over your assets and liabilities and give your stock certificates for their shares in the new corporation. These agreements are quite complicated but absolutely vital.
After all the assets have been formally transferred, the LLC can file its Articles of Dissolution and wind up.
This conversion method is arguably the most tedious and will have the most “down time.” First, you’ll need to complete all the necessary steps to close your LLC, including filing the Articles of Dissolution in your state. Then (if you haven’t already), you’ll wind up, liquidating your assets, paying debts, and distributing any remaining capital among your members. Then, you can completely reorganize as a corporation.
In the end, this method isn’t much different from a non-statutory merger; it primarily changes exactly how the LLC’s assets change hands. If one of your members doesn’t want to stay in the business, it may be a good method (or even a necessary one, depending on your operating agreement) to allow them to step away peacefully.
There are a couple drawbacks to this method, but the biggest one is the downtime. There’s a significant amount of paperwork to file. And while you’re filling it all out, you’ll have to cease business completely.
With any of these methods, you’ll have to finish a few additional steps. Typically, you’ll submit additional paperwork with the IRS. You’ll likely have to get a new EIN (Employer Identification Number). In some states, you’ll have to get a new state tax ID number from your state-level department of revenue, too. Ultimately, though, your tax paperwork responsibilities depend on the type of conversion you completed.
You’ll also need to begin adhering to corporate formalities, including appointing a board of directors, drafting company bylaws, and holding regular meetings for board members and shareholders. These operating requirements are a lot more complicated than running an LLC, but they’re absolutely essential.
If your LLC had foreign qualifications, you’ll also need to update those, as well. And you’ll need to update your bank accounts, too.
It’s tough to know exactly when you should change your LLC into a C corporation. If you detest your annual report every year, then the annual requirements of a corporation might be too much to handle. But if you have grand aspirations that require a lot of capital, a corporation might be the right fit.
If in doubt, we recommend chatting with an accountant or business lawyer (or maybe both) to see which option would be the best fit for your needs.
Converting an LLC into a corporation has a lot of vital paperwork, but it doesn’t have to feel too overwhelming. Whether you need help starting your first LLC, forming a corporation to merge with, ongoing compliance assistance, or anything in between, we’ve got your back. We’ll take care of paperwork so you can focus on what matters: making your business the best it can be.
Disclaimer: The content on this page is for informational purposes only, and does not constitute legal, tax, or accounting advice. If you have specific questions about any of these topics, seek the counsel of a licensed professional.
Yes, you can. Exactly how easy it is depends on what state you’re in, though. If your state allows statutory conversions, it’s quite simple. In other states, a conversion is still possible but a bit more complicated.
In most cases, a LLC-to-corporation conversion isn’t a taxable event as long as the assets of the LLC are transferred in exchange for stock. There are, of course, exceptions to this, because some conversions result in a taxable gain. And every entity conversion is a little different. We recommend consulting with a licensed tax advisor to discuss the implications of your unique conversion.
The IRS requires a business to get a new EIN any time their structure or ownership changes. So you can expect to apply for a new EIN (or get your first one) when you change your LLC into a corporation.
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