Converting An LLC To A C Corporation: Important Steps To Remember

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. A Limited Liability Company (LLC) may enter this 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.

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.

Statutory conversion

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.

Statutory merger

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.

Nonstatutory 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.

Closing thoughts

In reality, many businesses undergo structural conversion. As your development directions and business size constantly evolve, so will your expectations of the company.

By converting an existing LLC to a C corporation, you can gain access to dynamic investment options, enhance professionalism, improve your reputation, and significantly accelerate your path to success.

When deciding between a statutory conversion, a statutory merger, or a nonstatutory conversion, consider important factors such as your goals, resources, and the scope of your organization. For clearer instructions, consult with an attorney or a reputable tax advisor.

If you have any questions about your upcoming conversion or business in general, feel free to drop a message regarding your concern via service@bbcincorp.com or consult with our team directly in the chatbox below for more information.

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