Converting Your LLC to a C-corp
When you first opened your business, you may have opted to set it up as an LLC, a limited liability company. But there may come a time when converting it to a C-corporation makes sense. Such a decision is based on a number of factors and can bring about many benefits.
The Benefits of a C-corp
If you want to expand your business, converting to a C-corp could be your best option. By and large, investors usually prefer the structure of a C-corp. Although investors can receive equity in an LLC, a C-corp is necessary for allowing investors to purchase stock. So, if your goal is an initial public offering (IPO), you will need a C-corp.
As you likely know, an LLC can help you save on taxes initially, so it may seem daunting to face the tax implications of a C-corp. With an LLC, the automatic pass-through taxation means that profits and losses are directed to individual income tax returns of the LLC members. When your profits are low, this is an advantage. But when you start earning more money, your tax obligation will rise. Once your income reaches a certain bracket, the C-corp business structure makes more sense. Even though the C-corp will be subject to double taxation, your total tax liability may be lower than with an LLC.
Making the Conversion
If you are ready to make the switch to a C-corp, there are a few steps to follow. For a statutory conversion—a relatively new and more streamlined process recognized in many states—you will need to draft a plan and gain approval from the LLC members. Then you must file with the secretary of state for a conversion certificate and pay a filing fee.
A nonstatutory conversion can be more complicated. It requires that you form a new corporation and have LLC members transfer their assets to the C-corp in exchange for stock. Then the old LLC is dissolved. With this process, you must draft corporate bylaws, appoint a board of directors, have an initial board meeting, and issue the applicable stock certificates.
Another option is a statutory merger. It involves forming a new corporation and merging the LLC with it. This process requires you to file a certificate of merger and other legal documents with the secretary of state.
Whatever route you choose, be sure to consider timing. If you are able to carefully plan the conversion, you may want it to take effect on the first day of your taxable year. That way, filing tax returns and completing other administrative responsibilities will be simpler. If the first of the taxable year is not an option, be sure to select a date that your accounting department can easily track.
As you make the conversion, there are many details to consider. For instance, you must review all your contracts with vendors, suppliers, and lenders to see if any require third-party approval or notification of the conversion or name change. You will need to review permits and licenses and make changes to reflect the new entity. And you must update the company name on your website, social media, order forms, contracts, policies, labels, business cards, and other office materials.
Getting Good Advice
While converting your LLC to a C-corp is a standard process, you may have questions about your options and the best timing. To ensure that you make the most beneficial decisions for your company, be sure to consult legal counsel. The experienced corporate attorneys at Cotney can review your situation and offer you optimal guidance for your situation. When a conversion is mishandled, you could be left with a huge tax bill. But when handled well, you will be set up for growth and increased success.
Disclaimer: The information contained in this article is for general educational information only. This information does not constitute legal advice, is not intended to constitute legal advice, nor should it be relied upon as legal advice for your specific factual pattern or situation.