How to Convert an LLC to a C-Corp

Many founders start with an LLC because it is simple, then find that investors, employees or a larger plan point to a C-corporation. The change can be done, but there are three different ways to do it, and each has its own tax and paperwork effects. This guide explains the options, when a conversion makes sense, and what to settle with an accountant before you start. If you are still choosing, read our LLC vs C-Corp comparison first.

Why founders convert an LLC to a C-corp

• Raising money. Many investors, and especially venture funds, prefer to invest in a Delaware C-corporation. They expect stock, and often several classes of it.
• Stock options for a team. A corporation can grant stock options in a familiar way.
• A plan to sell or list the company. Buyers and underwriters usually want a corporation.
• Keeping profit in the company. A C-corporation is taxed on its own, which can suit a company that reinvests its profit.

A founder who runs a small business, pays out the profit and does not plan to raise money often does better staying an LLC. See Delaware C-corp vs LLC for startups.

Three ways to make the change

1. A statutory conversion

Some states, including Delaware, let an LLC convert into a corporation by filing a certificate of conversion with the state. The company keeps its history and contracts, and it becomes a corporation in one filing. You also adopt a certificate of incorporation, bylaws and issue shares to the owners. Check that both the state you are leaving and the state you are entering allow it.

2. Form a new corporation and move the business into it

You form a new corporation, then transfer the LLC's assets or the owners' LLC interests to it in exchange for stock. This works where a direct conversion is not allowed. The transfer can often be done without tax if it meets the IRS rules for transfers to a controlled corporation, but those rules have conditions, so an accountant should check it. The new corporation usually needs its own EIN, bank account and contracts.

3. Elect to be taxed as a corporation (Form 8832)

An LLC can stay an LLC under state law and choose to be taxed as a corporation by filing IRS Form 8832. Nothing changes at the state, and the EIN stays the same. This is the lightest change on paper. It is treated as a corporation for tax only, so you still do not have shares unless you create them in the operating agreement, and investors may still ask for a full corporation later.

What to settle before you convert

• The tax effect. A conversion is a taxable event in some cases. Get an accountant to confirm the route and the timing.
• The state. A Delaware corporation is common for fundraising. A business that operates in another state may also need to register there as a foreign company.
• Existing contracts, licences and bank accounts. A new entity may need them updated or reissued.
• The EIN. The route decides whether you keep your EIN or apply for a new one. Our EIN service can help with a new one.
• Foreign owners. A non-resident owner of a US corporation has extra rules: yearly IRS filings, and tax withheld on dividends paid abroad. See LLC vs C-corp for non-resident founders.

Checklist for a conversion

1. Decide why you are converting, and write down the investors or plans behind it.
2. Ask an accountant and a lawyer which route fits your state and your owners.
3. Prepare the corporate documents: certificate of incorporation, bylaws, share issue and board approval.
4. File with the state, or file the Form 8832 election.
5. Update your EIN information, bank account, contracts and licences.
6. Set up the corporation's yearly filings and its tax return.

Frequently asked questions

Can I turn my LLC into a C-corp later?

Yes. You can start as an LLC and convert when the need arises. Plan it with an accountant so the tax effects are known in advance.

Can I switch back from a C-corp to an LLC?

It is harder. Closing a corporation or converting it back can create tax on the company's value, so think carefully before you convert.

Does a conversion change my liability protection?

Both an LLC and a corporation protect owners' personal assets if the company is kept separate from the owners. The protection comes from running it properly, not from the type alone.

This is general information, not legal, tax or financial advice. Rules differ by state and by situation, so confirm the route with a qualified accountant and lawyer before you convert.

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• Company formation in the USA, online
• How to start an LLC
• How to register an LLC