How to convert your LLC into a C-corp

Often, founders start their business as a Limited Liability Company (LLC) because it’s cheap and quick to set up.

But as your business grows – particularly if you start looking for venture capital investment – switching to a C-corporation (C-corp) could be the right move.

This guide will cover the differences between the two structures, why you might convert and how to actually do it.

What are the key differences between an LLC and a C-corp?

Both LLCs and C-corps offer liability protection (meaning business owners aren’t personally liable for the company’s obligations).

But otherwise the two are different in many ways – we’ve shown them in this table:

Why convert your LLC to a C-corp?

To raise venture capital

Venture capitalists typically prefer C-corps over LLCs because of the way they’re taxed. An investor in an LLC could be taxed even if they don’t receive any distributions from the company – and VCs don’t like that! With C-corps, investors are only taxed if they sell their stock or receive distributions from the company (like a dividend) – that’s why VCs prefer them.

Also, investors – especially VCs – will generally only want to invest in Delaware C-corps. That’s because the laws in Delaware are very business-friendly and investors are most familiar with them.

So, if you started out with a non-Delaware LLC, say, an Iowa LLC converting it into an Iowa C-corp might not help improve your investability. But changing to a Delaware C-corp would.

We’ll cover how to do that in this article.

To offer employee equity

Unlike LLCs, C-corps let you issue stock, which you can use to attract and incentivize employees with equity.

It’s worth noting that with LLCs, you can offer employees ‘profit interest units’ (which give them the right to receive a percentage of the LLCs future profits). But it’s more typical to incentivize employees by offering them stock in the company – which C-corps let you do.

To scale globally

C-corps are generally better for international business operations. Most countries outside the US are more familiar with C-corps than with LLCs. So, for example, it might be easier to get better tax treatment abroad as a C-corp.

Are there downsides to converting from an LLC to a C-corp?

While C-corps do have some benefits compared to LLCs, there are some trade-offs too:

• Increased complexity: C-corps have more corporate governance complexity – for example, you’ll need to elect a board, adopt bylaws, and hold regular stockholder and board meetings.
• Double taxation: With C-corps, profits are taxed at the corporate level, and dividends are taxed again at the stockholder level. So, say your C-corp earned $100,000 in profits. The corporation would be taxed first – then, if stockholders receive a dividend, they’ll be taxed again on that personally too. LLCs use ‘pass-through taxation’ meaning you’re not taxed at the company level – only personally.
• Higher costs: Maintaining a C-corp comes with higher admin and legal expenses. You’ll need to pay for lawyers to prepare the company bylaws – or use accountants to deal with the double taxation complexities. Plus, there would be costs associated with filing annual reports, issuing stock certificates, and holding board and stockholder meetings.

Despite the downsides, keep in mind that investors rarely fund LLCs, so you’ll need to switch to a C-corp before securing funding.

If you start as a C-corp, great – you’ve saved time and money in converting. But if you’re set up as an LLC, most states allow you to convert to a C-corp. We’ll go over how to do that.

How to convert your LLC to a C-corp

The process of converting your LLC to a C-corp varies depending on the state where your business is registered (and where you want your C-corp to be).

Here are the three main methods – from simplest to most complex, these are:

1. Statutory conversion,
2. Statutory merger, and
3. Non-statutory merger.

The table further below will show you which of these options is available in your state – then read through how each option works below.

1. Statutory conversion

This is the most straightforward way to convert your LLC to a C-corp, but it’s only available in states that allow it. Luckily, it’s permitted in the state of Delaware (where most startups are registered).

If you’re not based in Delaware, check the table featured further below to see if statutory conversion is permitted in your state.

Using this method, all the assets and liabilities are automatically transferred from your LLC to a C-corporation (you don’t dissolve the original LLC).

Here’s how it works:

1. Member approval: First, you’ll need to get approval from all the members of the LLC that they’re happy to convert to a C-corp. So, you’ll need to prepare a document outlining the conversion plan and get each member to sign.
2. Certificate of Conversion: Next, you’ll need to file a ‘Certificate of Conversion’ and ‘Certificate of Incorporation’ with the Secretary of State where you want the C-corp to exist. If you’re converting from an LLC (either Delaware or non-Delaware) to a Delaware C-corp, use this form to prepare both of these.
3. File with the relevant Secretary of State: Once you’ve completed the necessary certificates, you’ll need to file these with the state’s corporations department. In Delaware, this is the Delaware Division of Corporations. You’ll need to file your completed certificates (it’s easiest to submit them online) and pay the correct fee. At the time of writing, it’s a minimum of $293 ($184 for a one-page Certificate of Conversion plus $109 for a one-page Certificate of Incorporation).
4. Transition members into stockholders: Finally, you’ll need to convert the membership interests of the LLC into corporate shares. This stock should match the members’ ownership percentages in the LLC. Members should also be given stock certificates to reflect their holding in the new C-corp.

Although statutory conversion is a straightforward process, get in touch with us so we can help make sure it’s done correctly. Also, you’ll need legal support to transition the members to stockholders and to prepare the formalities needed for the C-corp (like corporate bylaws).

2. Statutory merger

If statutory conversion isn’t an option where you’re registered, you can use a statutory merger to turn your LLC into a C-corp.

This is when you merge your existing LLC with a brand new C-corp, then dissolve the original LLC.

Here’s an overview of the process:

1. Incorporate a new C-corp: A new C-corporation will need to be formed in your chosen state. This will involve filing ‘Articles of Incorporation’ with the Secretary of State, appointing a registered agent, and creating initial corporate bylaws.
2. Member approval: You’ll need to get approval from all the members of the LLC to say they’re happy to merge with the new C-corp.
3. File with the relevant Secretary of State: Next, you’ll need to file a ‘Certificate of Merger’ (if your LLC is in a different state to the C-corp, you’ll need to file a Certificate of Merger in both states). This filing will include details like the names of the merging entities, the plan of merger, and the effective date. There will be some fees that apply to the filing, which will differ state-to-state.
4. Automatic transfer of assets: Then, all assets and liabilities of the LLC will need to transfer to the C-corp. By the end of this step, the C-corp will own all the LLC’s property, accounts and contracts. This transfer will typically happen automatically once the merger is completed.
5. Dissolve the LLC: Finally, you’ll need to make a filing to dissolve the original LLC. This will typically involve submitting a ‘Certificate of Dissolution’ where the LLC was registered. That will formally end the existence of the LLC.

This option is more complex that a statutory conversion, but it’ll still effectively turn your LLC into a C-corp. Get in touch with us so we can make sure the incorporation and the merger steps are done correctly.

3. Non-statutory conversion

This is the most complex option out of the three.

It involves creating a new C-corp, then individually transferring each of the LLC’s assets and liabilities to it (plus converting membership rights in the LLC into stock).

This is how you do it:

1. Incorporate a new C-corp: First, you’ll need to form a new C-corp in your chosen state. Among other things, you’ll need to file ‘Articles of Incorporation’ with the Secretary of State, designate a registered agent and create corporate bylaws.
2. Member approval: Next, you’ll need to get approval from all the members of the LLC that they accept the plan to transfer all the LLC’s assets and liabilities to the new C-corp.
3. Manual transfer of assets: Unlike the statutory methods, non-statutory conversion means you need agreements transferring each asset and liability from the LLC to the new C-corp. So, things like physical property, intellectual property, contracts and debts will each need to be transferred. This could mean you need a lot of legal documentation and even approvals from counterparties (like lenders or clients). So, it can get complicated!
4. Transition members into shareholders: Once everything is transferred, the LLC membership interests will need to be converted into stock in the new C-corp. You’ll need to make sure each LLC member receives an equity stake in the corporation that matches what they held originally.
5. Dissolve the LLC: As a final step, you’ll need to file a ‘Certificate of Dissolution’ to formally dissolve the LLC. This will mean the LLC ceases to exist as a legal entity.

Since the transfer of the assets and liabilities isn’t automatic, this route has the most legal steps (and therefore legal cost). So, it’s usually best to go with one of the other options.

Which conversion methods can be used in each state?

What you need to do post-conversion

Once your LLC has been converted into a C-corp, there are a few steps to complete the process (if you haven’t already done them):

• Draft corporate bylaws: These are the internal rules of how your C-corp operates. They’ll outline things like how directors are elected, the responsibilities of officers, and how shareholder voting takes place.
• Elect a board of directors: The board of directors oversees the corporation’s strategic direction and ensures that management aligns with shareholder interests. During your first organizational meeting, you’ll elect a board of directors (as outlined in your bylaws).

• Issue stock certificates: Certificates formalize the stockholders’ ownership in the corporation. You’ll need to issue certificates to the former LLC members whose membership rights were converted into stock. At SeedLegals, we manage your cap table to track who owns what – plus we can issue stock certificates instantly. If you book a call with us, we’ll show you how it works.
• Hold your first board and stockholder meetings: To kick off the new corporation, you should conduct the first board and stockholder meetings. During these meetings, you can approve the bylaws, appoint officers, and ratify any actions taken during the conversion from LLC to C-corp. Make sure you record minutes of these meetings so you have a clear record of how company decisions are made.
• Notify third parties about the changes: You might need to notify third parties about the name change (for example, from Company LLC to Company Inc.). If your business has any licenses or permits, this is particularly important to do. Also, if you’ve had to get a new EIN for your corporation, you should give this to your bank (check the FAQs below to see if you need a new EIN after the conversion).
• Update business materials to reflect the new name: Change any labels, business cards, purchase order forms, contracts, policies, and other materials that refer to “LLC” to now make reference to “Inc.”.

FAQs

My LLC was registered outside Delaware since that’s where we mainly operate. If I convert to a Delaware C-corp, can I keep operating outside Delaware?

Yes – you can use your Delaware C-corp to run a business outside the state. But there will probably be some extra steps you’ll have to take. For example, say you had a New York LLC operating a business based in New York. Once you’ve converted the LLC to a Delaware C-corp, you’ll need to register as a foreign entity with the New York Secretary of State by submitting the required application (an ‘Application for Authority’) and the associated fee (for New York, it’s $225). Speak to a legal professional who will be able to tell you what you need to do in this situation.

Do I need a new Employer Identification Number (EIN) if I convert my LLC into a corporation?

In most cases, the IRS will need you to request a new EIN after a conversion (check this with your attorney). You can apply for an EIN online through the IRS website.

Is converting an LLC to a corporation a taxable event?

Usually, no – a conversion won’t typically trigger any tax obligations. But there are some situations where it might. For example, if the LLC had more debts than it had assets, the conversion might result in members seeing a gain – which could be taxable. It’s best to speak to a tax professional first to make sure there aren’t any unexpected surprises.

I held units in the LLC that were subject to vesting. When I received them, I filed an 83(b) election. Do I need to file a new 83(b) election when receiving stock in the C-corporation?

Yes, if you’re receiving stock in the C-corp that’s subject to vesting, you’ll have to file a new 83(b) election – even if you already filed one for the LLC units you held.

Any Questions? Talk to the team.