Overview of Converting a C Corp to an LLC
An LLC passes business earnings straight to the member owners, and taxes are paid only when personal income taxes are filed. Converting a C corp is usually considered a taxable liquidation event. The corporation pays taxes on asset sales, shareholders pay capital gains taxes, and their stock basis transfers to the new LLC.
Step-by-Step Process for Conversion
- In order to convert a C-corp to an LLC, the first step is liquidation. This process requires the payment of taxes on both the shareholder distribution as well as the asset distribution.
Considerations for Changing from S Corp to C Corp
- You can voluntarily change from an S corp to a C corp anytime you wish. If you want the change to take effect on the first day of your corporation’s taxable year, you must revoke your S corp election by the 15th day of the third month of that tax year.
- Many states provide for a business entity conversion process that is both less complicated and cheaper than the traditional method. Using such a conversion process to change corporation to LLC does not require you to dissolve your corporation.
Key Conversion Elements
- It is vital to know that there is not just one type of company, one tax status of an LLC, or one type of conversion.
Process for Converting an S Corporation to an LLC
- In most cases, if your state allows you to convert an S Corp to an LLC, you’ll be required to prepare a plan of conversion outlining the details of the entity change. You may also be required to gain the approval of the board of directors before you’re able to present the conversion to your shareholders.
Reasons for Converting a C Corp to an LLC
Small-business owners wishing to convert their C corporation to a limited liability company (LLC) do so to avoid double taxation while maintaining protection of personal assets from business liabilities.