Key Takeaways

  • An LLC is not “incorporated” in the traditional sense but is a formally organized legal entity.
  • The terms "LLC" and "corporation" refer to different business structures with distinct legal implications.
  • Incorporating an LLC typically means converting it to a corporation through statutory conversion or merger.
  • LLCs offer flexible management and pass-through taxation but may lack credibility with some investors and lenders.
  • Corporations offer easier transfer of shares and enhanced funding opportunities but involve more regulatory requirements.
  • Business owners should evaluate their goals—such as scaling, attracting investors, or minimizing paperwork—when deciding whether to incorporate an LLC.

How to incorporate an LLC? Converting an LLC to a corporation can be done through statutory conversion or statutory merger. Incorporating can make it easier for a business to get funding from investors. To incorporate, LLCs need to make a number of changes including changing the name, changing the EIN, and appointing a board of directors.

LLCs Versus Corporations

The LLC business type is one of the preferred entity types for smaller businesses. LLCs have pass-through tax status and normally have simpler structures compared to corporations.

On the other hand, corporations are suitable for businesses that intend to grow by attracting investors. A business that starts out as an LLC might find itself limited by some restrictions on LLCs.

What It Means to Incorporate an LLC

The term “incorporate” is typically associated with forming a corporation, but it is often loosely used to refer to the legal creation of any business entity, including an LLC. Legally speaking, however, an LLC is not incorporated—it is formed or organized. Incorporation involves filing articles of incorporation and forming a corporate structure, while forming an LLC requires filing articles of organization.

That said, people often ask “can an LLC be incorporated?” when they’re really asking whether it can become a corporation. The answer is yes—an LLC can be incorporated by converting into a corporation. This distinction matters because corporations and LLCs are governed by different laws, have different internal structures, and offer different benefits depending on business goals.

Limitations of LLCs

Compared to corporations, LLCs have a number of limitations that might move some business owners to incorporate.

  • Transfer of ownership
    The sale of LLC membership interest is restricted. Many states require any transfers to be approved by all LLC members unless the operating agreement of the LLC states otherwise. This requirement and other LLC restrictions can limit the ability of LLCs to attract investors.
  • Getting bank funding
    Compared to corporations, LLCs are likely to have a harder time getting loans from lending institutions. It is common for lenders to insist that loans to LLCs be personally guaranteed by wealthy LLC members. This makes the LLC an undesirable business type for some business owners.

Common Reasons to Incorporate an LLC

While LLCs offer flexibility and tax benefits, many businesses choose to incorporate for the following reasons:

  • Attracting Investors: Corporations can issue various classes of stock, making them more appealing to venture capitalists and angel investors.
  • Credibility and Perception: The "Inc." or "Corp." designation often carries more prestige and may inspire more trust from vendors, clients, and lenders.
  • Stock-Based Compensation: Corporations can offer stock options to employees and advisors, which is a valuable tool for recruitment and retention.
  • Unlimited Life: Corporations continue to exist regardless of ownership changes, unlike some LLCs which may dissolve upon a member’s departure.
  • Easier Transfer of Ownership: Shares of a corporation can be bought and sold more easily than LLC membership interests.

Disadvantages of Corporations Compared to LLCs

Before converting your LLC to a corporation, you should understand certain disadvantages your business will inevitably experience when it becomes a corporation.

  • Double taxation
    Unlike LLCs which are pass-through entities for federal tax purposes, traditional corporations are required to pay federal corporate tax every year. This would likely eat into the earnings of shareholders.
  • Corporate formalities
    Corporations have a number of mandatory structural and management requirements. They must appoint a board of directors, hold board meetings and shareholders' meetings, and record major corporate resolutions during the meetings. These formalities certainly mean that the business will have more expenses when it incorporates.

Terminology Clarification: LLC vs. Inc. vs. Corp.

It’s important to understand the differences between the common suffixes attached to business names:

  • LLC (Limited Liability Company): A flexible, pass-through entity that is formed (not incorporated) by filing Articles of Organization.
  • Inc. or Corp. (Corporation): These suffixes indicate that a business is incorporated and has shareholders, a board of directors, and a more rigid structure.
  • Co. (Company) and Ltd. (Limited): These are general terms often used in business names, but they do not, by themselves, indicate a specific legal structure.

Confusion often arises because both LLCs and corporations offer liability protection and are filed with the Secretary of State. However, only corporations are technically incorporated.

How to Convert an LLC to a Corporation

There is a provision for LLCs to be taxed as corporations. If an LLC makes use of this option, it does not need to go through the complex process of conversion. All that is needed is to file IRS Form 8832 to get C corp tax status or IRS Form 2553 to get S Corp status.

However, to fully benefit from the investor-attracting prowess of corporations, an LLC might need to incorporate. Conversion of an LLC to a corporation can be achieved by one of the two common methods: statutory conversion or statutory merger.

Statutory Conversion

Statutory conversion is the easiest method of converting an LLC to a corporation. The exact process differs from state to state but it typically involves the following steps:

  • Electing to convert
    The LLC's members must discuss and approve a plan for conversion. Depending on the LLC's operating agreement, this plan might need unanimous support of the members.
  • Filing the certificate of conversion
    The LLC must then file a certificate of conversion to the state. This is normally accompanied by other paperwork including the original Articles of Organization of the LLC.
  • Issuing shares
    The membership interest of LLC shareholders is now converted to stock. After the conversion is approved, the LLC is dissolved.

Statutory Merger

Statutory merger is a more complex conversion method but it is normally the only option in states whose laws do not allow for statutory conversion. It typically involves the following steps.

  • Formation of a new corporation
    The LLC must form a new corporation. This would involve filing a Certificate of Incorporation to the Secretary of State.
  • Merging the new corporation and the LLC
    The new corporation is then merged with the LLC and the membership interest of the LLC members is converted into shares.

In rare circumstances, LLCs may be required to use another method of conversion called non-statutory conversion. This is complicated and needs the guidance of experienced tax lawyers.

Changes That the Newly Converted LLC Must Go Through

The new LLC has to get used to a number of changes including the following:

  • It must file the Certificate of Incorporation to the state.
  • It must appoint a board of directors.
  • It must adopt corporate bylaws.
  • It must hold annual board of directors and shareholders' meetings and keep a record of the meeting minutes.
  • It must issue stock certificates.
  • It must start paying corporate tax.

Administrative Considerations When Incorporating an LLC

When transitioning from an LLC to a corporation, several additional steps may be required beyond filing conversion documents:

  • Amend Business Contracts: Review and revise contracts that reference the LLC to reflect the corporation’s new legal status.
  • Notify the IRS: Apply for a new EIN, unless the IRS permits the reuse of the existing one.
  • Update Licenses and Permits: State and local licenses may need to be reissued under the corporation’s name.
  • Rebrand if Necessary: If your business name changes due to the new corporate structure, you’ll need to update marketing materials, bank accounts, and online profiles accordingly.
  • Inform Stakeholders: Notify customers, partners, and suppliers of the change to avoid confusion or contractual issues.

These steps ensure a smooth transition and help maintain operational continuity.

Frequently Asked Questions

  1. Can an LLC be incorporated without converting to a corporation?
    No. "Incorporation" specifically refers to forming a corporation. An LLC would need to convert to a corporation to be legally considered incorporated.
  2. What’s the difference between forming and incorporating a business?
    Forming applies to LLCs and involves filing Articles of Organization. Incorporating applies to corporations and involves filing Articles of Incorporation.
  3. Why would an LLC choose to incorporate?
    To attract investors, issue stock, improve credibility, or gain certain tax advantages, an LLC might incorporate into a corporation.
  4. Can I keep my business name when incorporating my LLC?
    Yes, but you may need to modify the suffix (e.g., change “LLC” to “Inc.”) and ensure the name complies with your state’s corporate naming rules.
  5. Do I need a lawyer to incorporate my LLC?
    While not legally required, consulting a business attorney can help ensure compliance and guide you through tax, liability, and operational implications. You can find experienced attorneys on UpCounsel to assist with incorporating your LLC.

If you need help with incorporating your LLC, 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.