Have you already established a set-up and now think it might not be the best choice in the future?
You are already in a situation when you formed an LLC (Limited Liability Company) to save compliance and time headaches. Now, you may want to do all the things a C-Corp can do for you such as equity compensation and raising venture capital in a standardized way. The good news is you can actually do that and nothing is uncommon now in a set-up. It is a usual practice in most of the states such as in Delaware. But before the formation of any corporation, you must understand the clear differences between the business entities first.
Just focus on what’s permeable for you! Here’s a detailed guideline of what things you need to know about converting an LLC into a C-Corp!
Difference Between An LLC And C-Corp
Both entities have different but definite structures. You must know the difference as it is something your interest may fall.
Tax Type: In an LLC, taxes pass from the company to the owners, which means through entities. But in a C-Corp, taxes do not pass through entities, shareholders pay income or personal taxes.
Issue Stock: Only C-Corps can stock multiple classes of stock but LLCs can’t do that.
Tax Payment Method: C-Corp offers a double-taxation method with shareholder and corporate taxes on dividends while LLCs’ owners file and pay taxes on their tax returns.
Retention: C-Corps like taxes offer easy earning retentions for all dividends, while LLCs may not have due to taxation on distributing shares.
Tax Options: If you have an LLC, you can convert it to a C-Corp or an S-Corp, but the members of a C-Corp can’t convert to an LLC.
Why Convert An LLC Into a C-Corp?
You can get the most advantageous circumstances while following this conversion.
- If you want to attract venture capital then you must convert from an LLC to a C-Corp. Venture capitalists and investors always favor corporations and receive equity in exchange. The most preferable C-Corps for these investors are the ones formed in Delaware, US.
- If you’re a startup and interested in joining an accelerator then a C-Corp is an additional selling point for you.
- You can also convert if you want to bring an equity plan for employees. An LLC doesn’t permit you to incentivize employees with the equity option.
What You Need To Convert An LLC Into A C-Corp?
These are almost the same basic requirements you consider while forming a C-Corp in the US. But for conversion, the requirements differ slightly and are listed below:
- Elect officers
- File Articles of Incorporation
- Elect Board of Directors
- Obtain a new EIN
- Issue Stock Certificates
- Hold a Meeting of Board Directors
- Draft Bylaws for C-Corps
The steps may vary according to how you choose to convert an LLC into C-Corps as the procedure offers different ways. You may be surprised if you need an EIN while converting an LLC into a C-Corp. However, you need an EIN if any of the following statements are true:
- You change to a sole proprietorship or partnership.
- You create a new corporation after a statutory merger.
- When your corporation receives a new charter from the state’s secretary.
- You become a subsidiary of a corporation or you already are using the parent’s EIN.
You do not need an EIN when you are a division of a corporation or if you change your corporate name or location. If you decide to convert without changing the business structure then you also don’t require an EIN.
How To Convert An LLC Into C-Corp?
After reading all the above descriptions, you finally decided to convert your LLC to a C-Corp.
Here are the steps mentioned below along with the types of conversions that you will choose first!
This is the first type and it is typically the simplest and easiest way to go about the conversion but the option may not be available depending upon the state. You can go for the other options in that case. A statutory conversion is a conversion process that is streamlined and offers state-specific regulations. You must contact the state office before choosing what state you’re going to incorporate.
With this conversion, you can transfer all the assets and liabilities of an LLC without dissolving the LLC completely. The former members of an LLC become shareholders and every asset or liability is transferred to a new corporation. It involves the following details:
- Create a conversion plan and then approve it by your LLC membership
- File a conversion certificate with the relevant state’s secretary jurisdiction.
- File relevant articles of incorporation and complete the requirements stated by the overseas corporate filing.
As the name suggests, this type of conversion effectively merges the existing LLC with a newly created C-Corp. It could be the best option to go if the state laws do not regulate the conversion according to the above type. It is a bit more complicated but you need technical a new C-Corp before starting the process. Once the new C-Corp is formed, you can approve a merger between the two and convert your LLC membership into share stocks of the new corporation.
You may need a certification of the merger with the relevant orders from the secretary of state to complete the process. You then need approval of this certification from the LLC members and then file a formal dissolution.
This type of conversion is generally less desirable than the two aforementioned types. This type requires a new corporation before the conversion event. After forming a C-Corp, all assets and liabilities then can be shifted or converted into membership rights and shares of stocks. The process can be complicated as it involves additional agreements and steps. Speak with your righteous attorney before stepping into this conversion-type process and see if you qualify for it.
Starting Over As A New Corporation
This is also an acceptable method as this requires dissolving everything and then starting a new venture. First, you need to complete the process of closing your LLC and then complete the requirements of starting a C-Corp. If you don’t want to go down-time, you can also wind up. It involves liquidating your assets, paying your debts, and distributing all the remaining payments among all the members. Then, you can start over completely as an organized C-Corp.
This method isn’t much different from that of non-statutory mergers. It exactly involves how the assets of an LLC are shifted first. It becomes easier for you if any of your members doesn’t want to stay in the business. You can allow them to leave peacefully. The process also requires significant paperwork to file and you need to cease business completely.
Tax Consequences of Converting An LLC Into A C-Corp
It’s crucial to understand what type of tax status already exists in the LLC while converting it to a C-Corp. The US tax filing system is complicated and the tax status determines how your business can be converted. There are significant tax consequences based on the transactions based on the conversion. The top three tax consequences are given below:
Your company will experience a double taxation system. This is the first clear consequence and the worth-knowing too. When you convert from an LLC to a C-Corp, this will bring a double-taxation experience for you. The C-Corp will be taxed on its annual profit first. After that, shareholders pay second taxes and that’s what they call a double taxation system.
LLCs may be taxable as a result of this conversion. LLCs are bound to pay taxes when borrow money and spend that money as expenses. LLCs may also experience an income gain based on LLC profits caused by the conversion. As LLCs are not recognizable as taxable entities, the members can change the tax status by using the ‘check-the-box’ classification. LLCs need to file the IRS Form 8832 to be taxed as a C-Corporation and the IRS Form 2553 as an S-Corporation. The instructions are mentioned on the forms and they need to be checked, completed, and submitted to the IRS. The date specified on the forms is effective to be followed. The effective time is no longer than 12 months. A multi-member LLC can change its tax status for taxable gain if liabilities are transferred to the corporation and these exceed the assets.
State-Specific Guidelines For Converting An LLC Into C-Corp
There are different guidelines and regulations in different states for LLCs while converting to C-Corps. That’s why it’s always important to check the state-specific guidelines before moving with a conversion. The local secretary of the state’s office adheres to provide you with all the guidelines.
The Delaware state is exemplary for establishing a start-up and is also most likely to convert to a corporation. These generally make the whole process much easier for conversion. You can receive appropriate forms for completing a statutory conversion when converting an LLC into a Delaware C-Corp. Follow, complete, and submit the forms appropriately for a smooth conversion.
Work With Fast Corp USA Professionals For A Smooth Transition
The whole process of transitioning an LLC into a C-Corp is a complex one and filled with many potential tax issues and steps. Whether it’s statutory merger, conversion, or non-statutory, it always comes with its own set of nuances and challenges.
The expert at FastCorpUsa can break down the process for you. Our professionals can help you with necessary paperwork, and guide you at every step. You can ask about potential tax queries and consequences from the experts present at our panel. We ensure you a smooth, and beneficial transition from an LLC to a C-Corp.
Consult us for a free business query today at email@example.com or call us at 1833 666 8883.