Converting your LLC to a corporation can be a smart move for your business, but the specific steps may vary depending on the state where your LLC was formed. In this article, we'll discuss the advantages of converting to a corporation, the differences in taxation, and the process for converting.
Advantages of Converting to a Corporation
There are several reasons why you should consider converting your LLC to a corporation, including:
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Raise capital: A corporation can raise capital more easily by issuing shares to investors.
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Access tax benefits: Depending on your tax planning goals, a corporation may offer tax advantages over an LLC.
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Issue shares to employees: Sharing equity with employees is easier in a corporation than in an LLC because a corporation can issue shares more easily.
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Keep your company running indefinitely: A corporation can outlive its founders, unlike an LLC, which may face automatic dissolution if there is no Operating Agreement in place that outlines what happens when a member leaves or dies.
Differences in Taxation
Taxation also differs between S and C status. Unless you file for S status with the IRS, your corporation will be treated as a C-Corp under Subchapter "C" of the tax code. If you elect S status, the IRS will treat your company as a pass-through entity, similar to an LLC or partnership, meaning there is no tax at the corporate level. If you wish to remain taxed as an LLC while enjoying other corporate benefits, an S-Corp is a good option. However, it is important to consult with a lawyer on the tax planning side of things before making this decision, as electing S status means your company will be an S-Corp permanently and cannot be reverted back to C-Corp.
Process for Converting
There are three ways to convert from an LLC to a corporation: statutory conversion, statutory merger, or non-statutory conversion. Statutory conversion is the easiest and least expensive method, but it may not be available in every state.
Before proceeding, check with your state to see if this option is available.
Statutory Conversion
If statutory conversion is available, you will need to prepare your plan of conversion, which outlines the terms and conditions of your new direction as a corporation. It is important for your members to approve this plan.
You will also need to file necessary documents with the state's business filing agency under the Secretary of State office. Although different states have different rules and forms, the most common documents to file are Articles of Incorporation, which contain important data about your company, and corporate bylaws that set the tone of how you will run your new corporation.
You will also need to complete a certificate of conversion, which may be called different names in different states (such as articles of conversion or statement of conversion), but your filing office should provide you with the proper form.
Once you have all of the necessary documents, you can submit the certificate of conversion along with your Articles of Incorporation and bylaws (if required) to your state filing office. You will need to pay an incorporation fee of around $100 to $300 when you file your Articles of Incorporation and bylaws.
When it Makes Sense to Convert
Converting your LLC to a corporation can be a wise decision for many businesses. It can help you raise capital, access tax benefits, issue shares to employees, and keep your company running indefinitely. If you decide to convert, make sure to research the specific steps required in your state and consult with a lawyer on tax planning.