Converting your LLC to a C-Corp: How to do it

When it comes to business structures, LLCs can be an excellent option to separate your personal assets from your business and enjoy better protection from liability, especially when you’re a small business.

After all, it’s the simplest and easiest option among all the available business structures. However, despite its numerous benefits, the LLC business structure isn’t always the right choice.

This is especially true if you’re looking to expand your business’s growth and maximize its potential since LLCs aren’t exactly designed for larger-scale operations. In that case, you may want to convert your LLC into a C-Corporation to accommodate your company’s growing needs.

Yet, how do you do it? Moreover, why should you convert your existing LLC to a C-Corporation? Let’s find out.

Why convert your LLC to a C-Corporation

As mentioned, LLCs provide business owners with a convenient and straightforward way to enjoy lucrative taxation, limited liability protection, and enhanced business credibility.

However, as your business grows and expands, the features of this business structure may no longer be enough to accommodate the additional needs. In that case, turning your LLC into a C-Corp may be the best choice.

Yet, why is it a good idea to do so? Well, here are some of the most common reasons:

• You want to appeal to venture capitalists who invest mainly in C-Corporations.
• You’re looking to have more investors for your company.
• You plan on giving your employees equity without making them partners.
• You’re planning to implement employee incentives and raise additional capital for the company.
• You want to enjoy the tax benefits for C-Corporations in some US states.

Of course, there’s also one primary disadvantage to converting your LLC to a C-Corp – double-taxation. In this case, regulations state that both the corporation and the shareholders should pay taxes.

This is because a corporation is considered a separate legal entity from its shareholders, so it needs to pay taxes on its annual earnings just like regular individuals.

Converting your LLC to a C-Corp: The three conversion types

Now that you know why you need to convert your LLC into a C-Corp, let’s discuss the three types of conversions you need to familiarize yourself with.

1. Statutory conversion

This conversion type is a relatively new method, and it’s also the easiest and most efficient way to convert your LLC into a C-Corporation. With this method, you only need to file a few forms with your state of incorporation’s state secretary office to start the process.

However, it would be best to keep in mind that the rules and forms for this conversion type vary from state to state, so you may want to check with your state of incorporation for additional guidelines.

In most cases, you only need to do the following to convert your LLC into a C-Corp through this method:

• Create a conversion plan and seek the approval of your LLC’s members
• File the Certificate of Conversion and other legally required documents, such as your LLC’s Certificate of Formation, with the state of incorporation’s state secretary

Aside from being simple and streamlined, this conversion method also ensures that the changes are applied automatically through the law instead of separate procedures and formal agreements. It’s also the least expensive way to convert your LLC to a C-Corp.

2. Non-statutory conversion

If a statutory conversion isn’t available in your state of incorporation, you can try a non-statutory type of conversion. However, unlike the former, a non-statutory conversion is generally considered the most complex conversion method.

It’s also the most expensive method since you’ll need to undergo several steps and get expert legal counsel to help you out.

With that said, in general, to undergo a non-statutory conversion, you’ll need to do the following to convert your LLC:

• Create a new corporation
• Formally transfer all your existing LLC assets and liabilities to the newly formed corporation
• Arrange the process of exchanging the LLC’s membership interests to corporation shares

With a non-statutory conversion, all your LLC’s existing assets and liabilities won’t be automatically transferred to your new corporation.

To do this, you’ll need to obtain a couple of special agreements for transferring and exchanging LLC membership interests to corporate shares.

3. Statutory merger

If you’re looking for a method that’s somewhere in between a statutory and non-statutory conversion, a statutory merger might be the best option. This method is slightly more complex than statutory conversions, but it’s still simpler than non-statutory ones.

Again, the specific steps for this conversion method tend to vary from state to state, so you need to check with your state of incorporation for the precise details. However, you generally just have to do the following:

• Create a new corporation
• Start a vote among the LLC’s members to approve the plan of merging their roles as members and corporation shareholders
• Request them to formally exchange their membership rights for corporation shares
• File the Certificate of Merger and other legal documents with your state of incorporation’s state secretary

Despite the additional steps, a statutory merger works similarly to statutory conversions since all the changes are applied automatically by the operation of the law. It’s slightly more expensive than statutory conversions since you’ll need to comply with more requirements.

Turning your business into an LLC can be an excellent way to establish your company’s legal entity, especially when you’re still starting out. However, as your company grows, you also need to consider whether your current business structure can accommodate its additional needs.

If not, converting your LLC to a C-Corp may be your best bet since it offers more room for growth, particularly in terms of your company’s operations. Of course, there are certain downsides to being a C-Corp as well, like double-taxation, but the transition can help you maximize what your business has to offer. With that said, hopefully, this article has helped you understand better how to convert your LLC to a C-Corp and what your options are for this process.

 

Story by Kurt Taylor. Taylor has consulted and empowered thousands of small business owners to incorporate their business. Business consultant/attorney with substantial experience as outside counsel in litigation and advisory capacity.