During the growth phase of a business, there will come a time when you need to change structure to accommodate newfound needs. If you’re thinking of converting your LLC to a c-corporation in Delaware then it’s crucial that you know what you’re getting into before that leap.
Aside from tax concerns, there are other variables that demand thorough research on your part before proceeding. Although you can always switch back to an LLC if things don’t go as planned, it’s best if you get things right the first time.
Overview about 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 converting 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 make them more complicated and waste 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 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, which 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.
The main advantage of conversion is that the management structure of a C Corp generates a well-established infrastructure. Making it adapted to fulfill the objectives and needs of your expanding firm. A solid and stable management structure gives the greatest degree of organization to a firm, which is backed by a yearly board of directors and shareholder meetings, as well as the drafting of bylaws that will assist steer the business moving forward.
Additionally, converting to a C Corporation can help attract investors. The corporate structure is generally seen as more stable, increasing prestige and credibility. With such a reliable profile, your corporation can gather more venture capitalists to raise the business capital by issuing stock. You can also offer shares to the employees, building a longer and much more stable relationship.
If you’re thinking about converting your LLC to a C corporation, Delaware is one of the best places to do it. The state is known for its business-friendly laws and its permissive attitude towards corporate governance.
On the flip side, converting LLC to a C corporation has some unattractive outcomes as well. Though LLCs have fewer investment alternatives, they enjoy significantly more favorable tax advantages than corporations. Only the members of an LLC are taxed. A C corporation, on the other hand, will be taxed differently. The business will be taxed. The founders, employers, and investors will be taxed separately.
Another downside is that you’ll have to comply with more regulations. The bigger structure the more complicated the regulation and management are. You may find yourself building everything from the start again.
For more information about the Delaware C Corp, check out the article What Is A Delaware C Corporation And How It Works?
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)
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 are 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 corporation.
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 firstname.lastname@example.org if you have any questions or concerns about this topic, or chat with our friendly consultant for actionable advice.
Frequently Asked Questions
Does Delaware allow statutory conversions?
Yes, Delaware does allow statutory conversions. To convert from an LLC to a C corporation, you will need to file a Certificate of Conversion and a Certificate of Incorporation with the Delaware Division of Corporations.
How long does it take to convert Delaware LLC to C Corp?
The process of converting a Delaware LLC to a C corporation can be completed in a matter of days, as long as all the necessary paperwork is in order.
How much does it cost to change an LLC to C Corp?
The cost of converting from an LLC to a C corporation will vary depending on the state in which you are doing business. But it will be at least $253 for the filing fee.
Is it hard to change from an LLC to a corporation?
The process of converting from an LLC to a corporation is not particularly difficult, but there are a few key steps that must be followed to ensure that the conversion is done correctly. First, it is important to file the correct paperwork with the state in which the LLC is registered. This paperwork will typically include a certificate of incorporation and a certificate of conversion. Once this paperwork is filed, the LLC will be dissolved and a new corporation will be created in its place.
When should I convert my LLC to C Corp?
There is no one-size-fits-all answer to this question, as the decision of when to convert an LLC to a C corporation will vary depending on the specific circumstances of your business. However, there are a few general considerations that you should keep in mind when making this decision. First, converting from an LLC to a C corporation can provide your business with greater flexibility in terms of how it is structured and operated. Additionally, converting to a C corporation can also help you to attract more investors and raise capital more easily. Finally, it is important to keep in mind that converting from an LLC to a C corporation will generally involve paying Corporate Income tax on your profits.
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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