Converting from LLC to C Corp

LLCs are one of the most common business entities, and their members enjoy limited liability and other benefits, making them great business entities. However, LLCs can convert to C Corps to benefit their shareholders even more. 

Tax consequences are worth considering before ending an LLC and beginning a C Corp. When you convert an LLC to a C Corp, there are requirements worth knowing, too. Here’s what you should consider when converting from LLC to C Corp.

What’s the Difference Between an LLC and a C Corp?

C Corps and LLCs are two business entities with significant differences between them. C Corps and LLCs differ in their business structure, tax payment requirements, and tax structure:

LLCs C Corps
Ability to Issue Stocks Unable to issue stocks Can issue multiple classes of stock
Tax Entity Type Pass-through entities, taxes pass through from the company to owners Not pass-through entities, shareholders pay corporate and personal income taxes (double taxation)
Tax Options for Members Members can choose to be taxed as a C Corp or S Corp Not applicable
Tax Payment Method Owners file and pay taxes on the LLC's profits on their personal tax returns, avoiding double taxation Double taxation occurs, with corporate taxes and shareholder taxes on dividends
Earnings Retention May not have easy earnings retention due to taxation on distribution shares Generally has easier earnings retention on dividends, which are taxed when distributed

When Is It a Good Idea To Convert from an LLC to C Corp

When you’re thinking of when to convert your LLC to a C Corp, it’s wise to focus on your company’s next steps. As your LLC experiences growth, you may feel compelled to convert it to a C Corp.

A few indicators will tell you when it's good timing to convert your LLC. It's a good idea to learn how to convert from LLC to C Corp when you’re seeking to:

  • Offer common stock to shareholders 
  • Offer limited liability for directors, employers, officers, and shareholders.
  • Lower self-employment taxes
  • Raise money from investors

    • What Do I Need To Do To Convert My LLC to a C Corp?

    You must follow several steps for an LLC to C Corp conversion. No matter how you convert your LLC to a C Corp, you'll need to do these things:

  • File Articles of Incorporation with your state's Secretary of State office. 
  • Draft bylaws for the new C Corp.
  • Appoint a corporate board of directors.
  • Elect officers.
  • Hold an initial board meeting. 
  • Issue stock certificates.
  • Obtain a new EIN.

    • On top of these requirements, additional steps vary depending on how you choose to convert your LLC to a C Corp. Each way you can convert your LLC to a C Corp affects what you'll need to complete the conversion. 

    The three ways to convert your LLC to a Corp 

  • Statutory conversion 
  • Statutory merger 
  • Non-statutory conversion

    • Statutory Conversion

    The first way to convert your LLC to a C Corp is by doing a statutory conversion. This option is new and not available in every state but is the fastest. 

    A statutory conversion comprises four steps, which are to: 

    1. Prepare a conversion plan. 
    2. Approve a conversion plan.
    3. File a certificate of conversion.
    4. File forms with the Secretary of State. 

    Statutory conversions are unique because this transfer offers valuable features for LLC owners. By converting your LLC to a C Corp through a statutory conversion:

  • The transfer of all of your LLC’s assets and liabilities happens automatically.
  • Your LLC members will automatically convert to C Corp shareholders.
  • You won’t have to do additional actions for statutory conversions, which are requirements for other conversion methods.

    • Statutory Merger

    A statutory merger is the second way you can convert your LLC to a C Corp. This process comprises five steps, and it may be best for LLC owners in states which don’t offer statutory conversions.

    To do a statutory merger, you’ll need to: 

    1. Form a new corporation that’s separate from your LLC.
    2. Have your LLC members approve a merger of the current LLC and the new C Corp.
    3. Have your LLC members exchange their membership rights for C Corp shares.
    4. File a certificate of merger and any additional required state paperwork.
    5. Dissolve your LLC.

    Similar to statutory conversions, statutory mergers allow your LLC assets and liabilities to transfer automatically to your C Corp.

    The last way to convert your LLC to a C Corp is by doing a non-statutory conversion. This option may be the most difficult for some LLCs, and it may be the most pricey option too. 

    Non-Statutory Conversion

    To do a non-statutory conversion, you’ll need to: 

    1. Form a new corporation.
    2. Transfer assets, liabilities, and ownership interests with separate LLC and C Corp agreements.
    3. Dissolve your LLC.

    3 Tax Consequences of Converting LLC to a C Corporation

    Three tax consequences of converting LLC to C Corp apply for newly formed C Corps.

    Lose your pass-through status

    Your new C Corp's tax status is the first tax consequence worth knowing. When you convert your LLC to a C Corp, it will lose its pass-through taxation status, and this will cause your newly formed C Corp to experience double taxation. 

    Changes in Taxation

    The second tax consequence will result from your LLC conversion to a C Corp: 

  • As a C Corp, your company and your shareholders will experience taxation. 
  • Your new C Corp will be taxed on its annual profits first. 
  • After the company pays its dividends to shareholders, shareholders pay a second tax.

    • May be taxable for LLCs

    Finally, the conversion of an LLC into a C Corp may be taxable for some LLCs:

  • This can occur in LLCs that spend money borrowed and then deduct the money spent as expenses. 
  • As a result, LLC members may experience an income gain based on LLC profits caused by the conversion.
  • You'll want to work with an experienced accountant to avoid this unintentional tax issue.

    • Work with Accounting Professionals To Ensure a Smooth Transition

    Transitioning from an LLC to a C Corp can be complex, filled with many steps and potential tax issues. Each method of conversion, whether it's statutory conversion, statutory merger, or non-statutory conversion, comes with its own set of challenges and nuances.

    The experts at 1-800Accountant can simplify this process. Our team of tax professionals can guide you through each step, help with the necessary paperwork, and get in front of any potential tax consequences. We help ensure your business transition is smooth and beneficial, so it's a smooth and hassle-free switch from an LLC to a C Corp. Schedule a free business consultation today!

    This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post. 1-800Accountant assumes no liability for actions taken in reliance upon the information contained herein.