Reasons to Change from LLC to Corporation
Changing a business entity from a Limited Liability Company (LLC) to a corporation can result in a modified business structure and tax return. An LLC is considered a pass-through entity for income tax purposes, while a corporation is not. Therefore, LLC owners may want to convert to a corporation to take advantage of lower corporate tax rates.
“If your company is exhibiting significant growth, converting from an LLC to a corporation will give you the flexibility to allocate some profits to qualify for a lower income-tax bracket," says Paul Sundin, a CPA and tax strategist. If you plan to offer stock options to employees, this benefit is available only through a corporation. In addition, “incorporating has a positive effect on a company’s legal liability," Sundin says.
What Happens When an LLC Converts to a Corporation
Weighing the benefits against the disadvantages of moving from an LLC to a C Corporation — as well as the steps involved in making the change — will also need to be factored into your decision-making process.
One of the key benefits of converting from an LLC to a corporation is the ability to raise capital. Corporations can issue stock, which can be sold to investors, whereas LLCs have limitations on the ability to raise money in this way. By becoming a corporation, the potential pool of investors and the amount of available capital can increase, allowing the business to scale and grow more quickly.
It’s difficult to pinpoint the right time to convert your LLC into a corporation, but a few general guidelines can offer some help. For example, you need to make the switch if you’re considering a public offering of stock in the future.
To simplify things, you can learn how to convert your LLC to a corporation by choosing one of the methods below. This will give you a better idea about the process – a process that can be done, with the help of a competent attorney, more easily.
A conversion of an LLC to a corporation can have significant tax consequences based on the transactions deemed to occur due to your conversion.
This guide will briefly outline what’s an LLC and what’s a C corporation, what are the main differences between the two, why you might want to ditch the LLC structure for a C corporation, and how to do it.