March 27, 2024
If your startup began as an LLC for simplicity’s sake but now aims to pursue opportunities like raising venture capital or offering equity to employees in a more structured manner, converting to a C-corporation could be a wise move. Luckily, changing from LLC to C Corp is feasible in many states and is a fairly common practice. Here’s a breakdown of what you need to know to make this conversion happen smoothly.
A C Corporation (C Corp) is a legal business structure in various States where the business is considered a separate entity from its owners (shareholders). It provides limited liability protection to shareholders and allows for multiple classes of stock, enabling flexibility in ownership and capital-raising. However, it is subject to double taxation, where both the corporation and shareholders are taxed on profits and dividends, respectively.
An LLC to C-Corp conversion involves changing the legal structure of a limited liability company (LLC) to that of a C Corporation (C Corp). This transition allows the business to operate as a separate entity from its owners, offering benefits such as limited liability protection for shareholders and the ability to issue various classes of stock. The conversion process typically involves filing appropriate paperwork with state authorities, amending the company’s operating agreement, and addressing tax implications, including potential double taxation.
LLC to C-Corp conversion involves several key steps:
1. File Articles of Incorporation with your state
2. Create bylaws for the new C Corp
3. Select a corporate board and elect officers
4. Conduct an initial board meeting
5. Issue stock certificates
6. Obtain a new EIN
Additional requirements depend on the chosen conversion method. Whether it’s a statutory conversion, merger, or asset transfer, each route has its specific procedures and paperwork to complete.
Converting your LLC to a C Corp can be done through three main methods:
This streamlined process, available in select states, involves creating a conversion plan, gaining approval, and filing necessary paperwork. It automatically transfers assets and liabilities to the new C Corp, converting LLC members to shareholders seamlessly.
In states without statutory conversions, LLC owners can opt for a merger. This entails forming a new C Corp, obtaining member approval for the merger, exchanging membership rights for C Corp shares, filing required documents, and ultimately dissolving the LLC.
This method involves forming a new corporation, transferring assets and liabilities through separate agreements, and dissolving the LLC. While more complex and potentially costly, it offers flexibility in structuring the conversion process. Each method has its nuances and implications, so careful consideration is essential when choosing the right approach for your business.
There are three tax consequences associated with converting an LLC to C Corp:
Converting to a C Corp means losing the LLC’s pass-through taxation status, leading to double taxation for the new C Corp.
Both the C Corp and its shareholders are subject to taxation, with the corporation tax on profits first and shareholders facing a second tax on dividends.
LLCs that previously deducted expenses funded by borrowed money may face taxable income gains upon conversion. Consulting with a knowledgeable accountant can help navigate potential tax issues.
Converting your LLC to C Corp offers several advantages:
Many accelerators require C Corp status for equity distribution, signaling preparedness, and facilitating equity allocation.
C Corps provides a standardized structure with preferred shares, simplifying comparisons for potential investors.
C Corps enables easy reservation and distribution of shares to employees, unlike LLCs where ownership is limited to partners.
Unlike LLCs, C Corps maintains legal continuity despite changes in ownership, avoiding dissolution complexities in such events.
Transitioning from an LLC to a C Corp involves complexities and tax considerations. Whether you choose statutory conversion, merger, or non-statutory conversion, challenges abound. However, AquiferCFO experts can ease the process. Our tax professionals navigate each step, handle paperwork, and address tax implications. We ensure a seamless and advantageous transition, making the switch hassle-free. Book a free consultation today for smooth guidance through this crucial business change.
