Converting an LLC to a C Corporation: An Overview
As your business grows and changes, your goals change as well. Fortunately, the legal structure of your business is not set in stone. If the LLC structure you initially chose for your business no longer serves your needs, it's possible to convert to a C Corporation.
Here's why that might make sense and how to get it done.
What is an LLC and what are the benefits of forming one?
A limited liability company (LLC) is a business structure that offers certain benefits to its owners, including limited personal liability for business debts and obligations.
Although LLC members are legally separate from the business, LLCs are pass-through businesses in the eyes of the IRS. This means the LLCs profits and losses pass through to the business owners, who pay taxes on that income on their personal tax returns.
Additionally, LLCs offer flexibility. For example, an LLC can elect to be taxed like a C corporation by filing Form 8832 with the IRS. When an LLC makes this election, it's no longer a pass-through entity in the eyes of the IRS. Instead, the company pays taxes on profits. Then the business owners are taxes on the salaries and dividends they receive from the corporation—a system referred to as double taxation."
While electing to be taxed like a corporation changes how an LLC is taxed, it doesn't change the business's legal structure. It remains an LLC.
What is a C Corporation and what are the benefits of forming one?
A C Corporation is another type of business entity that offers legal protection to its owners because the company owners are not personally liable for the debts and liabilities of the company.
C Corporations pay taxes on business profits—at a flat rate of 21%—at the corporate level rather than passing those profits through to shareholders' personal income tax returns.
Why convert an LLC to a C Corporation?
There are several advantages to converting an LLC to a C corporation.
One of the primary reasons companies choose C Corp as their business structure is because it allows them to bring in outside investors.
LLCs cannot sell stock. So if an LLC wants to bring in an investor, that person (or business entity) must be added as an LLC member, and the company must resubmit its articles of organization to the state.
On the other hand, corporations can sell an unlimited number of shares. This makes it appealing to entrepreneurs who intend to take a company public, attract venture capital, or offer employee stock options.
How do you convert your LLC to a C Corporation?
The process of converting an LLC to a C Corporation varies by state. However, most states allow the business to file a "Statutory Conversion."
Again, the steps vary by state but usually include the following steps:
1. Draft a conversion plan and have all LLC members/managers approve the plan.
2. File a certificate of conversion and articles of incorporation with your state.
3. Pay a filing fee.
You will also need to create bylaws for your new C corporation and hold a meeting of shareholders to approve the conversion.
Overall, converting from an LLC to a C corporation can offer greater protection for business owners and flexibility in taxes and fundraising. However, it is essential to carefully weigh the benefits and potential drawbacks before making the decision to convert.
If you need help evaluating the tax implications, schedule a call with Slate.