Converting LLC to C Corp: Everything You Need to Know
Converting an LLC to a C corporation allows business owners to create equity in their new corporation, among other benefits.3 min read
2. Statutory Conversions, Statutory Mergers, and Nonstatutory Conversions
3. Steps to Follow After Setting up a New LLC
4. The Advantages of Converting to a C Corporation
5. The Disadvantages of Converting to a C Corporation
Updated June 26, 2020:
Converting an LLC to a C corporation allows business owners to create equity in their new corporation, among other benefits. Doing so attracts investors and offers equity to its employees without making them partners. But converting from an LLC isn't without its drawbacks. Learn more about how the process works and its pros and cons to help you decide if a corporate structure is right for your business.
How Do You Convert From an LLC to a C Corporation?
LLCs are taxed as one of the following:
- Disregarded entity-- a single-member LLC
- Partnership-- an LLC with more than one member
- Corporation-- LLCs that have the option to convert to a C corporation
The process for converting to a C corporation varies from state to state. Consider hiring a business lawyer to help with the paperwork and requirements unique to your location. Though there will be some differences depending on your location, the basic process for converting from an LLC to a C corporation is to:
- Gain member approval or meet the minimum voting requirements outlined in your Articles of Organization.
- File the correct forms with the Secretary of State's office.
- Draft a conversion plan.
Statutory Conversions, Statutory Mergers, and Nonstatutory Conversions
There are three ways you can change your business structure from an LLC to a C corporation:
- Statutory conversion: LLCs in some states can execute a statutory conversion. This is a streamlined process that converts the LLC into a C corporation, establishes the LLC members as stockholders, and converts the LLC's assets and liabilities to the C corporation. Statutory conversions are simpler and cheaper than statutory mergers. However, this option may not be available in your state.
- Statutory merger: Through a merger, a new corporation is formed and then absorbs the LLC. This requires filing a certificate of merger with the Secretary of State. The merger then converts the LLC members' interests to stock in the new corporation.
- Nonstatutory conversion: This option removes all of the LLC members' interests, assets, and liabilities and formally assigns them to the new corporation. This requires that the members all formally agree to the proposed structure. This option is also complex and typically requires help from a small business lawyer. In most situations, it's better to go with another method if one is available in your state.
Steps to Follow After Setting up a New LLC
Regardless of which method you use to set up your new corporation, you'll have to go through a few steps to form a new corporation, including:
- Filing new articles of organization or incorporation
- Retrieving a new employer identification number from the IRS
- Creating corporate bylaws for your new business structure
- Electing officers and directors
- Scheduling board and shareholder meetings
- Issuing stock certificates
Before deciding to convert to a C corporation, meet with an attorney or small business consultant to determine if this is the best choice. Think carefully about the implications of changing your tax status, which conversion methods are available and best for you, and everything you'll need to do to get the new corporation up and running.
The Advantages of Converting to a C Corporation
LLCs typically convert to C corporations to attract investors and generate equity. Corporation accelerators make money through equity, so they're attracted to corporations. Venture capitalists are also interested in this structure because you can't issue stock as an LLC. Stocks give investors a consistent, reputable, and reliable way to spend their money and secure a return.
You may also convert to a corporate structure to offer additional benefits to employees. Since members of an LLC own all of the company, they can't give equity to employees without making them partners. But this is possible as a C corporation.
The Disadvantages of Converting to a C Corporation
Though LLCs are at a disadvantage in terms of investment options, this type of business structure enjoys far greater tax benefits compared to a corporation. With an LLC, only the members are taxed. However, with a C corporation, the business is taxed and then the founders, employers, and investors are taxed separately. Also, the conversion process can be complicated and expensive, especially if your state doesn't offer statutory conversions.
If you need help with converting an LLC to a C corporation, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.