LLC Conversion to C Corporation: Everything You Need to Know
LLC conversion to a C corporation allows limited liability company (LLC) members to incorporate their existing business entity. 3 min read
LLC conversion to a C corporation allows limited liability company (LLC) members to incorporate their existing business entity. If you initially establish an LLC, but your business has grown or changed to the extent that a C corporation structure is now more appropriate, it may make sense to make this transition. Working with an attorney who is well versed in legal and tax issues is highly recommended for LLCs making this transition.
It's important to consider the tax implications and the method of conversion, both of which depend on various factors. First, you'll need to decide on the type of corporation and tax treatment that is most beneficial. Options include:
- LLC taxed as a corporation, a partnership, or a sole partnership (disregarded entity).
- S corporations, which are subject to pass-through taxation, and C corporations, which are subject to corporate tax.
- Conversion methods that include statutory mergers, statutory conversions, and nonstatutory conversions.
The type of conversion dramatically affects both the process for making this transition and the tax implications of the new business entity.
Many states now offer statutory conversion, a somewhat new process that allows an LLC to convert to a corporation by filing forms with the office of the secretary of state. While rules for this process vary by state, in general, the LLC members must approve a plan of conversion and file a certificate of conversion.
As with other types of conversions, once the state has approved the paperwork, the LLC members are now stockholders in the corporation, and the assets and liabilities of the LLC (which no longer exists) now belong to the corporation. Because these effects occur automatically without the need for additional paperwork and filings, a statutory conversion is typically the quickest and least expensive option if it is offered in your state.
If your state does not offer statutory conversion, you may need to use the more complex method of statutory merger. While guidelines for this process vary by state, typical steps include:
- Formation of a new corporation with the LLC members as stockholders.
- A vote among LLC members to approve the merger, both as members and corporate stockholders.
- A formal exchange of LLC membership rights for shares in the corporation.
- Filing a certificate of merger and other required legal documents with the secretary of state.
As with statutory conversion, the LLC assets and liabilities are automatically transferred to the new corporation. However, the statutory merger requires the corporation to first form as a new business entity, a multistep process that requires fees. The LLC members must also create and file a merger agreement and a form for formal LLC dissolution.
This costly, complex method of conversion typically involves:
- Forming a new corporation.
- Transferring assets and liabilities from the LLC to the new corporation.
- Formally exchanging membership interest for shares in the new corporation.
- Liquidating and dissolving the former LLC.
Unlike statutory conversions and mergers, nonstatutory conversions require special agreements for the membership interest exchange and the asset and liabilities transfer. This can be handled in multiple ways. However, regardless of the chosen procedure, the LLC owners must:
- File Articles of Incorporation with the secretary of state office, including a form indicating LLC conversion where required.
- Draft bylaws for the new corporation.
- Appoint corporate board of directors and elect officers.
- Hold an initial board meeting.
- Issue stock certificates.
- In most cases, obtain a new EIN number.
If the required steps are not followed, the new corporation may not have continued limited liability. Make sure that no existing agreements or contracts, such as leases, licensing, banking documents, and insurance, will be nullified when you convert the LLC to a corporation.
State-Specific Conversion Guidelines
Arizona does not allow an LLC to convert to a corporation. Instead, the LLC must be dissolved and a new corporation created from scratch. However, an LLC can merge with an existing corporation under statutory guidelines.
Delaware offers simplified rules for entity conversion, and a Delaware LLC can be converted to a corporation as long as the majority of members have approved. You must file a Certificate of Conversion followed by a Certificate of Incorporation for the new entity, along with the required fees.
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