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When and why you should change your LLC to a C corporation
Entities may convert from one structure to another to meet urgent needs, such as scaling up or going public. It would not be rare for a Limited Liability Company (LLC) to reach the phase when changes are vital to its success.
Here are several situations you can anticipate to happen as a sign of the need for innovation.
- A public offering of stock in the future is being considered
For an LLC, owning and issuing stocks is not an option. C corporations, however, can issue multiple classes of stock, including stock with preferences for dividends and distributions corporations.
This will also help attract investment from the public audience because they can raise funds through stock sales.
- Stocks are offered as compensation
As for stocks of a C corporation, you may issue them as a form of compensation to early investors or organizers, or you can distribute them regularly as a salary to employees.
By holding a stake in the company, your team members will feel the motivation to contribute and become more dedicated to their work.
- You’re looking for additional investment options
Generally, owning shares of a corporation is more convenient than owning interests in a limited liability company due to its transferability. Purchasing a C corporation at the same time entails owning part of the business.
Venture capitalists tend to invest in C corporations as a reputable way to spend their money and secure a return on their investment.
Stock shares can be freely transferred between shareholders unless restricted by a buy-sell agreement. Moreover, there are no restrictions on the number or nationality of corporate shareholders except when the corporation’s policies specify them.
- The conversion is essential for further development
Entrepreneurs tend to favor starting their business from an LLC since it is simpler than forming a corporation and requires fewer documents. Nevertheless, your company will soon require more integration and space for growth, more than an LLC structure can afford.
A C corporation is indeed complex in structure, followed by plenty of strict regulations and detailed-centric paperwork. Be as it may, these characteristics only strengthen the credibility and value of your business in the eyes of stakeholders.
LLCs can opt to be taxed as a sole proprietorship, a partnership, or a corporation without going through the conversion, but that alone is not enough for the business to grow.
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How to convert an LLC to a C corp in the U.S.
The conversion of an LLC to a C corp structure in America can be demonstrated in three different ways. State-specific requirements will vary, so you should consult a professional advisor before making any decisions.
The most prominent and cost-effective process helps convert the LLC directly into a C corporation by establishing the LLC members as corporate shareholders and transferring the business assets and liabilities to the new C corporation.
This process usually requires the members’ approval of a conversion plan and the filing of relevant forms with the appropriate state regulatory office. A statutory conversion is, unfortunately, a recently introduced process that may not be an option in every state.
For instance, in Delaware, you will need to file a Certificate of Conversion and a Certificate of Incorporation with the Delaware Division of Corporations to execute the statutory conversion.
As its name suggests, through a merger, a new C corporation will be formed and then merged with the former LLC. Here are the common steps you will have to follow in this procedure:
Step 1: Prepare a merger agreement
Step 2: Have the LLC’s members (also the shareholders of the C corporation) approve the merger and give up their LLC membership rights
Step 3: File a merger certificate and other legal paperwork with the state regulatory office
Step 4: Dissolve the old LLC and start running the C corporation
This process results in the automatic transfer of assets and liabilities to the new entity, similar to a statutory conversion. Due to the complexity of forming a brand new C corporation, this process is much more straining and time-consuming. Still, you can follow it as an alternative if your state does not recognize statutory conversion.
This approach is arguably the most costly, impractical, and unfavorable to entrepreneurs. In most situations, it is usually advisable to choose other methods if they are allowed in your current jurisdiction.
First, you must set up a new corporation like a statutory merger. As part of the formal transfer process, assets, liabilities, and ownership interests will be transferred from the LLC to the C corporation with separate agreements.
Finally, the LLC’s dissolution is crucial to end the process.
Additional post-conversion steps
After the transition has been completed, the next step for owners of C corporations is to enact their bylaws and elect their board of directors and members of the shareholder’s group. The board then picks out the officers to manage and lead the company toward joint goals.
Regular meetings are necessary to keep investors updated on the company’s financial status and ongoing progress.
The new C corporation is expected to issue stock and potentially comply with additional financial reporting requirements.
In reality, structural conversion is not sparse among businesses. Your development directions and business size evolve constantly, and so will your expectations of the company.
Once converting an existing LLC to a C corporation, you can now gain access to dynamic investment options, more professionalism, a better reputation, and a significantly bigger accelerator to achieve success.
Whether your team decides to go with a statutory conversion, a statutory merger, or a nonstatutory conversion, be sure to consider the following factors: your goals, resources, and the scope of your organization. Talk with an attorney or a reputable tax advisor for clearer instructions.
If you have any questions about your upcoming conversion or business in general, feel free to drop a message regarding your concern via firstname.lastname@example.org or consult with our team directly in the chatbox below for more information.
Frequently Asked Questions
What are some advantages of a C corporation?
For owners planning to attract investment and issue shares of stock, converting to a C corp model is essential thanks to these strength points:
- Limited legal liability protection
- Attracting investors
- Flexible ownership structure
- Perpetual existence
- Free transferability of shares
- No direct operations management
- Retained earnings
Furthermore, since members of an LLC own all of the company, they can’t give equity to employees without making them partners. But this is possible as a C corporation.
Read more details on the pros and cons of a C corp to see the bigger picture and make the right decision for your business.
How do you form a C corporation in the U.S.?
Forming a whole new C corporation will be profitable and cost-saving if you are:
- Running a big company (since the launching expense is high as well)
- Looking for funding through investors
- Aiming for special rights, regarding dividends and voting rights
- Working with international partners or engaging in overseas sales
- Planning to sell the business or transfer ownership in the future
Find out about the forming process of a C corporation and important notes.
On the contrary, how do you convert my C corporation into an LLC?
In the event that an enterprise owner sincerely wishes to reduce their tax burden, increase their liability protection, or simply reduce the amount of paperwork, converting their corporation to an LLC may be the right course of action.
There will be three methods to convert from a C corporation to an LLC with the same names as well: statutory conversion, statutory merger, and nonstatutory conversion, again, based on the state you are operating in.
Do you need a new EIN when changing an LLC to a C corporation?
If an LLC elects to be taxed as a C corp, it does not need to get a new EIN. All that’s necessary is filing the 8832 form. It remains an LLC for state charter purposes, but files taxes like a C corporation (both federal and state).
In this specific case of conversion, since the LLC wants to re-form as a C corp, it will be viewed as a new entity. This means a new charter from the state, and it must get its unique EIN number. Your bank will request the new EIN when opening a new bank account for the corporation.
How much does converting an LLC to a C corp cost, particularly in Delaware?
The filing fees would be about $253 (minimum cost) in total, paid to the Delaware Secretary of State when filing the required paperwork. Additional fees may apply if a registered agent service is involved in the process.
Disclaimer: While BBCIncorp strives to make the information on this website as timely and accurate as possible, the information itself is for reference purposes only. You should not substitute the information provided in this article for competent legal advice. Feel free to contact BBCIncorp’s customer services for advice on your specific cases.
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