Key Takeaways:

  • Converting an LLC to a C Corp in Delaware involves several legal steps, including preparing a Plan of Conversion, filing a Certificate of Conversion, and a Certificate of Incorporation.
  • Delaware is a preferred state for incorporation due to its business-friendly laws and strong investor appeal.
  • Conversion helps businesses attract venture capital and issue stock more easily.
  • Tax considerations and ensuring that ownership stakes translate correctly into corporate shares are critical factors.
  • The process typically takes two weeks, with an expedited option available for an extra fee.
  • Costs include filing fees for the Certificate of Conversion, Certificate of Incorporation, and additional regulatory expenses.
  • Alternatives to conversion include dissolving the LLC and creating a new C Corp from scratch.
  • Post-conversion, compliance with Delaware franchise tax and corporate governance is required.
  • A lawyer or business consultant can be helpful in ensuring compliance with all legal and tax requirements.

Converting LLC to C Corp Delaware is used by business owners to change the structures of a business. It's important to know the necessary steps in this type of conversion so that your business does not run afoul of the law.

Steps to Convert an LLC to C Corp

The following are steps involved in converting an LLC into a C Corp

  • The first step is to make sure that the laws that will be used in administering the organization post-conversion allow for a conversion of the business into a C Corp.
  • Produce LLC Consent and Agreement as well as a Plan of Conversion. You can hire an attorney to prepare a Consent of the members of the LLC which permits the transformation of the LLC into a C Corporation.
  • Confirm the capitalization of the business before and after conversion.
  • Confirm the pre-conversion valuation of the LLC and audit the capital account.

Additional Compliance and Legal Considerations

Beyond filing the required documents, there are additional legal and compliance steps to consider when converting an LLC to a C Corporation in Delaware:

  • Updating Operating Agreements: The LLC’s operating agreement should be reviewed to ensure it does not contain provisions that may conflict with the conversion.
  • Tax Elections: Consult with a tax professional to determine whether the new corporation should elect S Corp status (if applicable) or remain a C Corp.
  • Employment and Payroll Setup: If the LLC had employees, the corporation will need to obtain a new Employer Identification Number (EIN) and set up payroll.
  • Updating Contracts and Agreements: Vendor agreements, client contracts, and leases may need to be amended to reflect the new corporate entity.
  • Regulatory Licensing & Permits: Businesses in regulated industries may need to update licenses to reflect their new corporate status.

What Information Can Be Found in a Conversion Plan?

If units were granted by the LLC, your attorney might draft an Agreement and Plan of Conversion that details the process for converting the units into shares after conversion into a C Corp.

You also need to prepare and file some documents with the Delaware Division of Corporations including:

  • Certificate of Conversion from a Delaware or Non-Delaware Limited Liability Company to a Delaware Corporation
  • Delaware Certificate of Incorporation

How Long Does the Filing of Registration Take?

If you choose the expedited option, the registration should take between two and three days.

How Much Does the Registration Cost?

The price depends on the number of pages. The standard filing cost for 2019 was $260, and it may be as high as $300 if the number of pages you are filing is more than what the base price covers. You can check the current price on the website of the Delaware Division of Corporations.

Ongoing Costs and Compliance Requirements

Once the conversion is complete, the newly formed C Corp must comply with ongoing costs and regulations, including:

  • Delaware Franchise Tax: Corporations must pay an annual franchise tax, which varies based on revenue and shares authorized. The minimum tax is $175, but it can be much higher for large businesses.
  • Annual Report Filings: Delaware requires C Corps to file an annual report and maintain updated records with the state.
  • Board of Directors and Shareholder Meetings: Unlike LLCs, corporations must hold regular board meetings, record minutes, and follow governance rules.
  • Registered Agent Fees: A Delaware C Corp must maintain a registered agent in the state, which typically costs around $50–$200 per year.
  • Corporate Record-Keeping: Maintain shareholder records, bylaws, stock issuance documents, and board resolutions.

Failure to comply with these obligations can lead to penalties or administrative dissolution.

Is It Difficult to Convert an LLC to a C Corp?

Converting an LLC to C Corp is easy. The process is fast, and the required paperwork for the conversion is easy to understand. Typically, the state of Delaware will process the paperwork within three days. It's also affordable as it generally costs less than $300 to convert an LLC to a C Corporation in Delaware.

Why Do LLCs Convert to C Corp?

The main reason why most LLCs convert to C Corporation is to attract venture investment.

Tax Implications of Converting LLC to C Corp

When converting an LLC to a C Corp, there are important tax considerations:

  • Double Taxation: Unlike an LLC, where income passes through to members, a C Corp is taxed at the corporate level and again when distributing dividends to shareholders.
  • Capital Gains Tax: If the LLC has appreciated assets, transferring them to a C Corp could trigger capital gains tax.
  • Qualified Small Business Stock (QSBS) Exemption: C Corps may qualify for Section 1202, which allows certain investors to exclude up to 100% of capital gains from taxation when selling their shares.
  • Net Operating Losses (NOLs): LLCs converting to a C Corp may lose their ability to carry forward NOLs that existed before the conversion.
  • IRS Filing Requirements: The business will need to file Form 1120 (corporate income tax return) and may be subject to additional state tax obligations.

Consulting with a tax professional before conversion is highly recommended to avoid unexpected liabilities.

What Can Be an Alternative to Converting an LLC to C Corp?

If you don't want to convert to a C Corp, you can decide to wind down the business and start a new Delaware Corporation. Discuss the issue with your attorney to assess the merits of the two options.

Pros and Cons of Converting an LLC to a C Corp

Pros:

  • Access to Venture Capital: Most investors prefer C Corps because they can issue different classes of stock.
  • Stock Options for Employees: A C Corp can offer equity-based incentives, such as Restricted Stock Units (RSUs) or Stock Options, which are common in startups.
  • Legal Structure for IPO: If a company plans to go public, it must be structured as a C Corporation.

Cons:

  • Double Taxation: The corporation pays taxes on profits, and shareholders pay taxes again on dividends.
  • More Paperwork and Costs: Corporations have stricter compliance obligations, including annual reports, board meetings, and SEC filings (if applicable).
  • Loss of Pass-Through Taxation: Unlike an LLC, which passes profits directly to members, C Corps retain earnings and face corporate tax rates.

What Are the Costs Involved When Converting an LLC to C Corp?

The following provides details of the paperwork and fees required for converting an LLC to C Corp

  • Certificate of Conversion (DE): $164
  • Certificate of Incorporation: About $89 (minimum)
  • Certificate of Conversion (MI): $35
  • Certificate of Authority (MI): $60
  • Certificate of Good Standing: $50
  • Certified Delaware Agent: About $50/yr.
  • Delaware Franchise Tax: About $350/yr.

The filing fee for Certificate of Incorporation depends on the number of authorized stocks in the corporation, except where you choose a law par value. The Delaware Secretary of state collects the fees.

How Long Does the Conversion Process Take?

It takes about two weeks to process a Certificate of Conversion and a Certificate of Incorporation in Delaware. However, you can opt for expedited processing for an additional fee ($100 for Certificate of Incorporation and $200 for Certificate of Conversion).

Is a Certificate of Authority Required When Converting to a C Corp?

The business has to file for a Certificate of Authority if the post-conversion C Corp intends to operate in the state of Michigan. To obtain a Certificate of Authority, the entity must also apply for a certificate of good standing under Delaware law and jurisdiction.

Do You Need to Determine the Amount of Total Stock to Authorize When Converting to a C Corp?

Yes, you need to determine the total number of authorized stock and its par value.

What Are the Factors Considered When Converting from LLC to C Corp?

The two important factors to consider during conversions include:

  • How to prevent the conversion process from being taxed, and
  • How to ensure that the ownership equity of members in the LLC is equivalent to the value of the shares distributed to them when it becomes a C Corp.

Frequently Asked Questions:

1. How long does it take to convert an LLC to a C Corp in Delaware?Typically, the process takes about two weeks, but expedited services can reduce this time to 2–3 business days.

2. Do I need a lawyer to convert my LLC to a C Corp?While not legally required, hiring an attorney can ensure the conversion is done correctly, legally, and tax-efficiently.

3. Will I need a new EIN after converting?Yes, the IRS generally requires a new Employer Identification Number (EIN) for the C Corp.

4. What happens to my LLC’s bank accounts and contracts after conversion?The new C Corp will need to update business bank accounts, vendor agreements, and contracts to reflect the new legal entity.

5. Can I reverse the conversion if I change my mind?No, once an LLC is converted into a C Corporation, the process is irreversible. To return to an LLC, you would need to dissolve the C Corp and form a new LLC.

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