Can an LLC Convert to a Corporation?
Yes, you can convert your Limited Liability Company (LLC) to a corporation. However, understanding the income tax consequences of such a conversion is essential.
LLC to S-Corporation Process
If you believe your business structure should be changed from LLC to corporation, the LLC to S-Corporation process requires two steps: converting your LLC to a corporation and then electing S-Corporation status with the IRS.
Requirements for S-Corporation
- Must be a domestic corporation.
- Must have no more than 100 shareholders.
- None of the shareholders can be a partnership, a corporation, or a nonresident alien.
- There can only be one class of stock.
Advantages of Converting to a C Corp
The four major consequences of switching from an LLC to a C Corp can be broken down into management complexity, filing and compliance, the ability to raise capital and taxes.
How To Transition An LLC To A Corporation
When deciding to convert an LLC into a Corporation, there are different ways to achieve this transition depending on the state where the business is located. Usually, you can choose from one of three ways if you wish to convert an LLC to a corporation.
Benefits of a Corporate Structure
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.
Considerations for Conversion
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.
Plan Your Conversion
First, You Need A Plan. The starting point is to create a plan of conversion. The plan must contain certain information about the entity, the conversion, and organizational documents.
Tax Implications of Conversion
A conversion of an LLC to a corporation can have significant tax consequences based on the transactions deemed to occur due to your conversion.
Why Convert to a C Corp
Some founders convert from an LLC to a C-corp for two reasons: 1. Better chance of raising venture capital money. 2. Determine the liabilities and tax consequences of your re-filing.
Timing and Conditions
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.