Converting LLC To C Corp In Delaware: Not As Difficult As You Think

Overview of the entity conversion

Entity conversions are a way of changing the legal status of a business from one type to another. There are different methods of entity conversions, including statutory conversion, a merger, or a non-statutory conversion

A statutory conversion is changing the business structure without having to form a new entity or dissolve your current entity. And, by legislation, the post-conversion business is deemed the same as it was before conversion, except that it is now conducted under a different type of corporate entity. The assets and liabilities, as well as ownership interests, are transferred by law.

For example, when a business converts from an LLC to a C corporation. This means that the LLC now is considered to be a converting entity or the existing entity. And the corporation that the LLC is converted to would be the converted entity, or the entity resulting from the conversion.

Statutory conversions are recognized as the most common conversion since the process is rather simple and affordable. Compare to other methods such as a merger, or a non-statutory conversion. These choices involve much more paperwork and the decision-making of relevant members, which makes them more complicated and wastes a lot of time.

A merger or a non-statutory conversion involves forming an entirely new business entity, followed by a vote to approve a merger between two separate businesses into a new entity. What makes it so unpopular to businesses is because of the transferring process. You will need to transfer the assets from your former entity to another and cease your original business.

Pros and Cons of converting an LLC to C a Corp in Delaware

A limited liability corporation combines the convenience and flexibility of a partnership or sole proprietorship with the higher risk protection of a corporate structure. LLC owners (known as “members”), like corporate shareholders, have limited liability. This means that their personal obligation to the firm is limited to the amount they have invested and does not extend beyond that to pay corporate losses or debts.

A C corp is a type of business entity structure like an LLC or corporation. C corp is also a tax classification accessible to both corporations and LLCs, albeit corporations are more commonly utilized. The C-corporation is called after the Internal Revenue Code section (subchapter “C”) that describes its tax status.

So before making the conversion of one business, it is wise to draw out the benefits and drawbacks of the conversion so that you can prepare for what will be coming.

Benefits of the conversion

The primary benefit of conversion is a well-established management structure in a C Corp, suited to meet the objectives and needs of your growing firm. This solid foundation includes annual board meetings, shareholder gatherings, and bylaws to guide the business forward.

Moreover, converting to a C Corporation enhances investor appeal by providing a sense of stability, prestige, and credibility. This robust corporate structure attracts venture capitalists who can contribute to your business capital through stock issuance. Additionally, offering shares to employees fosters enduring and secure relationships.

Drawbacks of the conversion

However, converting an LLC to a C corporation also comes with drawbacks. While LLCs have limited investment options, they benefit from more favorable tax advantages compared to corporations. Only the LLC members are taxed, whereas a C corporation is subject to separate taxation for the business, founders, employees, and investors.

The process of converting LLCs to Delaware C Corp

If you’re converting your LLC to a Delaware C Corporation, there are a few key things to keep in mind.

Obtaining everyone’s support and approval for the conversion is the first step. Therefore, a meeting will need to be called. This can be done electronically or in person.

Then, you’ll need to file a Certificate of Incorporation and Certificate of Conversion to the Secretary of State.

The Certificate of Incorporation

• The name of the corporation;
• The address of the corporation’s registered office and the name of its registered agent at such address
• A statement of corporate purpose
• Incorporator(s)’s name and mailing address
• The number of shares authorized by the corporation and their class, rights, and restrictions
• Par value of the stock
• Other additional information (if any)

And for

The Certificate of Conversion

• The original LLC name
• Date and State the LLC was first created if it has changed, its jurisdiction immediately before its conversion to a corporation.
• The name of the corporation is mentioned in the accompanying Certificate of Incorporation.

After getting approval from the State, you may now attend to administrative matters such as drafting the company’s bylaws or onboarding key personnel to your operation. You can also choose to hold a subsequent board meeting to begin raising capital. Finalize every document using the official corporation name on your business documents, and file the required annual report with the state.

If you are having trouble maintaining the new corporation, feel free to check out

Filing fees for Delaware LLC to Corporation conversion

The minimum cost would be about $253, which includes

• $164 to file a one-page certificate of conversion (add $9 to each extra page)
• $89 to file a one-page certificate of incorporation
• As for the filing fees for the Certificate of Incorporation, it will vary depending on the amount of authorized stock. Note: for Domestic and non-Delaware entities to the corporation: +$164
• If you would like a certified copy it will be an additional $100.00. ($50.00 for the Conversion and $50.00 for the Certificate of Incorporation). Expedited services are available please contact our office concerning these fees.
• Delaware entities converting to any other non-Delaware or domestic entity must also pay all applicable taxes.

This fee is paid to the Delaware Secretary of State when filing the required paperwork. Additional fees may apply if a registered agent service is used.

Taxation for Delaware LLC-to-corporation conversion

The Delaware Franchise Tax for the LLC-to-corporation will be charged when the filing for the current and the following years is due.

For example, if the tax for 2019 was not paid by the deadline of June 1st and your LLC intends to convert during 2020, you must pay both years’ tax as both LLC and C corporation. In short, you will be taxed twice for the year of conversion, 2020, because of having been operating as both LLC and a corporation.

Which

taxes to pay ?

forms to file ?

Find the answers you need in this guide.

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Conclusion

While LLCs provide flexibility and make taxes, accounting, and compliance more manageable for your firm, a C Corp may be a better choice if you want to seek capital from investors or want to go public.

For every business owner, converting from an LLC to a C Corp is a significant move. We trust that this guide will make the process easier for you. Get in touch with us at service@bbcincorp.com if you have any questions or concerns about this topic, or chat with our friendly consultant for actionable advice.