There are numerous reasons to consider turning your LLC into a corporation, ranging from simplifying stock compensation to cutting taxes. While a limited liability corporation (LLC) form may work for your firm at first, it may not work for you in the long run. Operating as an LLC may, over time, prove to be a hindrance to your business’s growth for various reasons. This is not uncommon, and if you find yourself in this circumstance, you can convert your LLC to a corporation. However, before you make this adjustment, you should think about a few key variables and possibilities.
Converting LLC to C Corp
Converting your small business from an LLC to a corporation is a complicated procedure that depends on a number of criteria. Converting an LLC taxable as a partnership to a C corporation by a statutory merger is fundamentally different from converting an LLC taxed as a corporation to an S company through a statutory conversion, both in terms of tax ramifications and required documentation. Here, we’ll aim to keep things simple by focusing on multi-member LLCs that have been taxed as partnerships and have converted to closely owned C corporations.
Understand Differences between LLC and Corp
For business owners who are considering forming a corporation or a limited liability partnership, understanding the differences between the two is critical. As the name implies, there is a separation between the company’s management and its owners in the case of a Limited Liability Company.
The members are the ones that put money into the company’s capital, but their liability is limited to the amount they put in. On the other hand, a corporation is a business entity that consists of a group of people acting as a single entity. They are the company’s stockholders and may be responsible for day-to-day management in circumstances when there is no such division of responsibilities between providers of capital and management.
Which business structure is better: LLC or C corp?
Both types of entities have the legal benefit of assisting in the safeguarding of assets from creditors and giving an additional layer of protection against legal liability. In general, forming and managing an LLC is significantly easier and more flexible than forming and managing a corporation. The sort of business an individual is starting, the potential tax repercussions of forming the firm, and other factors all factor into the choice to form a limited liability company (LLC) or a corporation.
When and why to convert LLC to C corp?
Limited liability company (LLC) members can convert their existing business entity to a C corporation by converting their LLC to a C corporation. If you started your firm as an LLC, but it has expanded or altered to the point where a C corporation structure is now more appropriate, it may make sense to switch. For LLCs making this change, consulting with an attorney who is well-versed in legal and tax concerns is highly recommended.
It’s crucial to think about the tax ramifications as well as the conversion process, which are both influenced by a variety of factors. To begin, you’ll need to decide on the best sort of corporation and tax treatment for you.
A limited liability company (LLC) is taxed as a corporation, a partnership, or a single proprietorship (disregarded entity). S corporations, which are taxed on their profits, and C corporations, which are taxed on their profits. Statutory mergers, statutory conversions, and non-statutory conversions are all examples of conversion processes. The form of conversion has a significant impact on both the transition procedure and the tax implications of the new company entity.
Why is it the right choice to convert LLC to C corp?
In legal terms, an LLC is not a company. It’s essentially the same as a sole proprietorship or general partnership—a company in which the owner(s) and the business are one and the same—but with an added layer of protection in case something goes wrong. A sole proprietor or partner in a partnership is solely responsible for the debts and losses of their business. The phrase “limited liability corporation” comes from the fact that an LLC limits the owner’s (or owners’) responsibility. If an LLC is sued, it is the company, not the owners, who are sued. The only money on the table is that which has already been put into the company. A lone proprietor or member of a partnership facing a lawsuit, on the other hand, may lose their personal assets. While an LLC provides legal protection, there is no barrier between the organization’s income and the income of its owners. An LLC is a pass-through entity, which means that earnings are distributed to the owners.
How to convert LLC to C corp?
Although there are many advantages to starting your business as an LLC, such as a flexible structure and ease of establishment, you may need to restructure as a corporation later on. Converting from an LLC to a C-corp can make it easier to raise funds, among other things, but it can be a time-consuming procedure for some businesses. Both LLCs and C-corporations protect business owners from personal liability in the event of corporate debts or litigation, but the two have different ownership structures and tax implications.
These are the three ways to convert the LLC to Corp and hence make them effective and more productive:
The process of statutory merging is more difficult than the process of statutory conversion. If your state does not permit statutory conversions, you will almost certainly employ this procedure. While particular details vary by state, the following are the most common processes in a statutory merger:
- Create a new company – This means your LLC members will now also be corporation stockholders, and;
- Vote to approve the merger – Both as LLC members and as corporation investors, have the LLC members make a vote to move forward with the merger.
A statutory conversion is a relatively recent, streamlined technique that allows you to convert your LLC to a corporation by completing a few forms with the secretary of state’s office. It is currently accessible in many states. Each state that allows statutory conversions has its own forms and regulations. In general, however, the stages for a statutory conversion are as follows:
- Prepare a conversion strategy and have the LLC members accept it;
- With the secretary of state, file a certificate of conversion, as well as an LLC certificate of formation and other legally required documents, if necessary.
Nonstatutory conversion is the most difficult and costly method of converting an LLC to a corporation. The main steps are, in a nutshell:
- Create a new company;
- Transfer the assets and liabilities of your LLC to the corporation in writing;
- arrange for the legal swap of LLC membership interests for corporate stock, and;
- Otherwise, the corporation should be properly liquidated and subsequently dissolved.
Role of 409a valuation while converting LLC to C Corp
A 409A is used to calculate the fair market value (FMV) of your company’s common stock, which a third-party valuation firm usually does. The striking price for options granted to employees, contractors, advisors, and anyone else who receives common stock is determined by 409As.
Importance of 409a valuation
If you require a 409A valuation, you must obtain one. They will assist you in avoiding tax problems with the IRS. If you don’t receive a 409A valuation when you need one, you and your employees could be on the hook with the IRS for a lot of money. You’ll need a 409A valuation if, for example, you give your employees and contractors the option to buy 500 shares at $1 each.
Maintain IRC guidelines when converting
It’s critical to understand how a 409A valuation affects stock options. A 409A valuation may or may not affect stock options. You don’t have to worry about 409A if your stock options or stock appreciation rights are valued at or above fair market value. Of course, you may not be able to tell if your stock options are valued at fair market value merely by looking at them.
It’s usually best to err on the side of caution and acquire a value to make sure you don’t have to file under section 409A. A 409A filing is required when stock options are not at or above fair market value. The value of the items may be determined by the valuation.
Understanding post-conversion LLC to C Corp
When you originally launched your company, you were undoubtedly convinced that the many advantages of an LLC (Limited Liability Company) were just what you needed: pass-through taxation, liability protection, and easy governance. Perhaps your company is now gaining traction and rapidly expanding. It may be time to explore transforming your dependable LLC into a corporation so that you can reap new benefits.
5 important things you should consider after converting
In terms of taxation, an LLC is a hybrid business entity that can be classified as a sole proprietorship, a partnership, or even a corporation. It’s a company structure founded under state regulations in the United States, which differ from one state to the next. Therefore there’s no single set of rules. Businesses that are classified as C Corporations operate uniquely. First, such businesses must pay a corporate income tax, which is separate from the tax that the owners must pay on their portion of the company’s profits.
- Filing a new article for your business – A “business piece” is any piece of material you create to directly or indirectly present information about a company. Business writing includes blogs, news releases, bulletins, brochures, flyers, emailers, and presentations. You must be aware of what kind of business article you must require.
- Preparing corporate bylaws – When a company is formed, its board of directors will establish a set of corporate bylaws that serve as specific guidelines for the business. Corporate bylaws are crucial to corporate governance since they spell out how the business will be governed. The management structure, meeting requirements, stock issuance, and other critical corporate policies will all be outlined in the bylaws. Corporate bylaws can be considered as the company’s operating manual. They will establish policies and processes for the company to follow. Bylaws will spell out what a corporation may and cannot do, as well as the responsibilities of each director and corporate officer.
- Elect officers and directors – A public company’s board of directors is elected by its shareholders. The board of directors makes major decisions on matters like mergers and dividends, as well as hiring and remunerating senior executives. Nominations for the board of directors might come from the company’s nominations committee or from outsiders looking for a change.
- Organize board and shareholder meeting – It is critical for all organizations to understand how to conduct a shareholder meeting. Corporate law mandates that the board of directors and shareholders meet on a regular basis. A meeting of all shareholders is held once a year in most cases. As a result, all shareholders should be called to the meeting, where they will discuss important formal business matters. Election of new board members, financial concerns, and other prospective short- and long-term aims and objectives are examples of such items.
- Start issuing stock certificates – A stock certificate is a physical piece of paper that represents the ownership of a corporation by a shareholder. The amount of shares owned, the date of purchase, an identifying number, generally a company seal, and signatures are all included on stock certificates. The certificates are typically a little larger than a regular sheet of paper, and most of them feature complicated designs to prevent fraudulent duplication and counterfeiting, which was an issue for much of the pre-internet history of corporate stock investing.
Need help with a 409a valuation when converting an LLC to C Corp?
Remember that a proper 409A valuation can assist in protecting you from unfavorable tax consequences, and if an investor rejects your valuation, the IRS might as well. To receive the best protection, it’s a good idea to seek a 409A valuation from a reliable, independent provider. With the 409a valuation, Eqvista can assist you in converting your LLC to a C Corp. All you have to do is complete the contact form, and one of our consultants will contact you.