C Corp To LLC Conversion: Convert A C Corp To An LLC | Business Globalizer (2024)

Going through a C Corp to LLC conversion might feel like quite a big leap—trust me, I know; as we do the process almost every other day. Whether it’s for more flexibility, tax benefits, or a simpler business setup, people do convert a C Corp to an LLC—quite a normal thing if you may ask. Now now, I’m definitely not judging here, but can assure you one thing: Whatever your reason is, turning your C Corporation into a Limited Liability Company can bring quite a positive change in your entrepreneurial journey!

Without further delay, let’s break down the whole process of converting C Corp to an LLC together and make this conversion as smooth as possible. Shall we?

C Corp

A C Corporation or C Corp in the US is a separate legal entity from its owners, providing shareholders with limited liability protection. It’s known for double taxation—profits are taxed at the corporate level and again when distributed to shareholders as dividends. There’s no restriction on the number of shareholders, making C Corps attractive to larger businesses.

C Corp has a formal management structure with a board of directors and officers, ensuring compliance with legal and regulatory standards. This business structure in the US also helps owners and shareholders in accessing capital markets more easily, which is why many large companies opt for this entity type.

LLC in the US

A Limited Liability Company or LLC is one of the most popular and cost-effective business structures in the US. It’s especially appealing to entrepreneurs and small to medium-sized businesses for its simplicity and the protection it offers. The term “limited liability” refers to the key benefit that LLC members enjoy—protection of their personal assets.

In other words, if the company incurs debts or faces legal challenges, the personal finances and assets of the LLC’s owners are shielded from risk. This separation is quite a crucial safeguard for business founders who want to keep their personal assets safe while running their company.

C Corporation Vs. LLC

There are several differences between C Corps and LLCs. Some of those are shortly discussed below:

• Naming Requirements: A C Corp name must include “Inc.” or “Incorporated.”

  An LLC uses “LLC” or something similar to show it’s a limited liability company.

• Taxation: C Corps deals with double taxation, where profits are taxed at both the company and shareholder levels.

  LLCs offer pass-through taxation, meaning profits are only taxed once on the owners’ personal returns.

• Management Structure: C Corps have a formal setup with a board of directors and official meetings.

  LLCs allow for more flexibility, with no need for traditional roles like CEO or formal hierarchy.

• Compliance: C Corps must follow strict rules, like holding annual meetings and keeping minutes.

  LLCs don’t have to meet these requirements, making them easier to manage.

C Corp to LLC Conversion

Converting a C Corp to an LLC can bring significant benefits, such as more flexibility in management and tax advantages. There are three main ways to transition from a C Corp to an LLC:

1. Statutory conversion,
2. Statutory merger, and
3. Non-statutory conversion.

The approach depends on your state’s regulations, with statutory conversions being the simplest in states that allow them.

Each method involves transferring assets, liabilities, and shareholder interests, helping you smoothly shift from a corporate structure to a more flexible LLC.

Benefits of LLC Over C Corp/Why Change C Corp to LLC

The decision of C Corp to LLC conversion could be a great idea to go with, as there are several reasons why it could be a smart move, especially for small business owners. Learn the following reasons and consider those for yourself:

Avoid Double Taxation

LLCs allow for pass-through taxation, meaning the business profits are only taxed once—on the members’ personal tax returns. In contrast, C Corps always faces double taxation, where both corporate profits and shareholders’ dividends are taxed.

Easier Management

Unlike a C Corp, an LLC doesn’t require a formal board of directors or scheduled meetings. This makes running an LLC simpler and reduces the burden of administrative tasks.

Fewer Compliance Requirements

LLCs aren’t bound by the strict rules that C Corps have, such as keeping formal minutes or holding annual shareholder meetings, making compliance less of a hassle.

Flexible Profit Distribution

An LLC lets members divide profits however they choose, without sticking to ownership percentages like in a C Corp.

Lower Administrative Costs

LLCs come with fewer legal formalities, making them cheaper to run and helping you save on accounting, legal, and compliance costs—unlike the added challenges you’d face with a C corporation.

Potential Risks or Disadvantages of C Corp to LLC Conversion

When transitioning from a C Corp to an LLC, there are some risks and challenges you should be aware of:

• Conversion Costs & Tax Changes: Converting your C Corp to an LLC can bring in some considerable costs, which vary by state. This conversion will also change your business’s tax structure, impacting your tax obligations.
• Limited Investment Opportunities: Unlike C corps, LLCs can’t offer shares to the public, which may limit your ability to raise capital easily.
• Tax Implications: If your C corp holds appreciated assets, converting to an LLC might trigger a taxable event, leading to potential tax liabilities such as self-employment taxes.
• Loss of Tax Benefits: Valuable tax benefits, such as net operating losses (NOLs) or unused tax credits, may no longer be available after the conversion.
• Ownership Structure Changes: If your business has a complex ownership setup, converting can be complicated, especially with multiple shareholders.
• Transfer Taxes: Some states may impose transfer taxes, which can add to your conversion costs.

Convert C Corp to LLC Tax Consequences

Converting from a C Corp to an LLC comes with some important tax considerations you’ll want to be aware of:

• Asset Transfer Taxes: When your corporation’s assets are transferred to the new LLC, it can trigger taxes. The corporation itself may face taxes on the liquidation of its assets, and shareholders could also be taxed on what they receive.
• Possibility of Reducing Taxes: In certain situations, tax liabilities can be minimized. However, the tax burden can often outweigh the benefits of the conversion.
• Expert Advice Recommended: With tax implications being complex, consulting a tax advisor is essential to understand how it could impact your business.

Required Documents for Converting a C Corp to an LLC

To convert your C Corporation into an LLC, you’ll need to gather the following documents:

Certificate of Conversion: This certificate officially recognizes the change from a C corp to an LLC at the state level.

• Articles of Organization/Certificate of Formation: Required to formally set up your new LLC, these need to be filed with the state authorities.
• Plan of Conversion: A detailed document that outlines how the conversion process will take place and under what terms.
• Board of Directors Resolution: The board’s formal approval to move forward with the conversion must be recorded.
• Shareholder Approval Documentation: Shareholders must approve the conversion, and their agreement is documented here.
• IRS Forms and Notifications: Required to inform the IRS about the change in tax classification.
• State-Specific Forms and Filings: Depending on your state, you may need additional forms for the conversion.
• Operating Agreement: This document details how the new LLC will be managed and operated.
• Updated Business Licenses and Permits: Your business licenses may need to be updated to reflect the new LLC structure.
• Notification to Other Agencies and Stakeholders: Inform all relevant agencies and stakeholders about the change in the business entity.

State-Specific Conversion Requirements and Restrictions

When converting a corporation to an LLC, each state has its own rules. Here’s a simplified breakdown:

• Every state has different procedures for conversion. Some states offer simple forms, while others need you to prepare documents like your own articles of conversion.
• In Florida, for example, you must first approve a conversion plan, then submit a certificate of conversion along with the articles of organization to the Florida Department of State.
• If your state doesn’t provide forms, it’s wise to consult a legal expert to draft or review your conversion documents.

Restrictions

Statutory conversions are a relatively new option in the US, allowing you to convert a corporation directly into an LLC without having to form a completely new entity. To ensure the process goes smoothly, it’s important to follow these steps:

• Get approval from the current board of directors for the conversion plan.
• Hold a stockholders’ meeting to secure their consent for the conversion.
• File the necessary documents with the state’s secretary of state office and pay any applicable fees.

However, not all states allow statutory conversion. States like New York, Pennsylvania, and Montana currently disapprove of converting a C corp into an LLC through a statutory conversion process. Be sure to check your state’s regulations before proceeding.

Consideration Before Converting a C Corp to an LLC

Before moving forward with a C Corp to LLC conversion, there are several key factors to evaluate to ensure it’s the right choice for your business. Here are the factors to consider:

• Tax Implications: Converting from a C Corporation to an LLC can bring notable tax consequences. When your C Corp’s assets move to the new LLC, it’s generally seen as a “liquidation” and thus creates a taxable event. This often means both the corporation and its shareholders might face taxes—one last double taxation, if you may ask—on these transfers. While there are a few cases where tax burdens can be reduced, they’re uncommon, and for most businesses, the tax costs might outweigh the benefits. A consultation with a tax attorney can help clarify whether this transition is financially advantageous for your business.
• Ownership and Structure: C Corps generally offer better scalability for attracting investors, something LLCs may lack. Think about how converting to an LLC could impact your ownership structure and your ability to raise future capital.
• State Regulations: Each state has its own rules for the conversion process. You have to make sure that you understand the specific legal requirements in your state to ensure an easier and hassle-free transition.

When to Convert from a C Corp to an LLC

There are specific situations when converting your C Corp to an LLC might make sense for your business:

• Flexible Ownership: For small business owners seeking an easier and more relaxed setup, an LLC provides just that. With no limit on the number of owners and minimal paperwork, it’s far less formal than a C Corp.
• Better Tax Treatment: One of the biggest perks of an LLC is avoiding double taxation. LLCs pass profits and losses directly to the owners, which means you won’t have to pay corporate taxes, potentially reducing what you owe overall.
• More Control Over Decisions: In an LLC, members can make management decisions without needing board or shareholder approval, giving you more freedom over daily operations.
• Stay Independent: With an LLC, you’re free from shareholder influence, keeping control in your hands while still having the flexibility to raise capital.

Ways to Convert a C Corp to an LLC

There are three common and popular ways to convert a C Corp to an LLC. However, not all methods are available in every state. So, it’s important to check your state’s specific requirements before starting the procedure.

1. Statutory Conversion

Statutory conversion is the easiest, most popular, and most uncomplicated way to convert a C Corp to an LLC, but it’s only available in certain states. Take a look below to learn how it works:

• Get approval from the board of directors to move forward with the conversion.
• Gain shareholder approval for the conversion plan.
• Submit a certificate of conversion to the state’s Secretary of State.
• Include all required documents, such as the new LLC’s formation certificate.
• Transfer the C Corp’s assets and liabilities to the LLC.

Once everything is approved, the conversion is complete. Following that, the Shareholders automatically become LLC members, and the C Corp’s assets and liabilities are transferred to the newly formed LLC. This method allows for a hassle-free transition where creating a new entity from scratch is not needed.

2. Statutory Merger

In the statutory merger method, you’ll form a new LLC and merge your existing C Corp into it. While this option is more involved than a statutory conversion, it’s available in states where direct conversions aren’t an option. The process of statutory merger is as follows:

• Form a new LLC that will merge with your existing C Corp.
• Prepare a merger agreement.
• Get approval from the C Corp’s shareholders and LLC members.
• Exchange C Corp shares for LLC membership interests after gaining approval.
• Submit a certificate of merger to the Secretary of State.
• Dissolve the C Corp after the merger is finalized.

In some cases, you’ll need to apply for a new Employer Identification Number (EIN) for the LLC. The timeframe for completing a statutory merger can vary depending on your state’s specific requirements and the availability of shareholders for the vote.

Non-Statutory Conversion

If your state doesn’t offer statutory conversion or merger options, a non-statutory conversion may be your route to go. This method is more complex and time-consuming but still gets the job done. Here’s what it looks like:

• Form a new LLC.
• Transfer the C Corp’s assets and liabilities to the LLC through a formal application.
• Create a separate agreement for the C Corp shareholders to become LLC members.
• Dissolve the C Corp by filing the required documents with the state.

This process typically takes longer and may require legal assistance to ensure everything is handled properly. You’ll also need a new EIN for the newly formed LLC.

Each of these methods has its own pros and cons, so the best option depends on your business’s location and specific needs.

How to Convert a C Corp to an LLC

Converting a C Corp to an LLC requires following a few essential and common steps—whether it’s statutory conversion, statutory merger, or non-statutory conversion—though the process may vary by state. Take a look:

• Draft a Conversion Plan: In some states, a formal plan is needed for the conversion process. Review your state’s rules to understand what details to include. Typically, the board reviews this plan before it’s shared with shareholders.
• Get Shareholder Approval: Whether a conversion plan is needed or not, most shareholders must agree on the conversion. If your bylaws set a specific voting majority, that standard must be met for approval.
• File Necessary Documents: Submit the required documents, which may include a certificate of conversion, articles of organization for the LLC, or a certificate of formation. Filing fees vary by state.

Once these steps are completed, the corporation’s assets and liabilities will transfer automatically to the new LLC.

IRS Form to Convert C Corp to LLC

Converting a C Corporation to an LLC doesn’t involve a specific IRS form, but rather a series of steps that differ by state:

• Statutory Conversion: If allowed in your state, submit a Certificate of Conversion to the Secretary of State to smoothly switch your C Corp to an LLC.
• Articles of Organization: File this document to officially establish the new LLC.
• Tax Implications: Since the entity’s tax status changes, you may need to apply for a new Employer Identification Number (EIN) from the IRS.
• State-Specific Documentation: Additional forms may be necessary depending on state regulations.

Final Steps on Converting a C Corp to an LLC

Once you’ve filed the necessary paperwork to convert your C Corp to an LLC, there are a few important final steps to take:

• Obtain a new EIN if you used the merger or non-statutory conversion process.
• File the Articles of Organization with the Secretary of State to officially establish the LLC as a legal entity.
• Choose between a member-managed or manager-managed LLC.
• Draft an operating agreement that outlines each member’s roles and responsibilities.
• Open a dedicated business bank account for your LLC to manage payroll, taxes, and other transactions.
• Decide how your LLC will be taxed.

Ensure all members understand the new structure and the potential tax implications. Transparency and open discussions are key to maintaining trust during this transition.

C Corp to LLC Conversion Deadline

Timing is everything when converting a C Corp to an LLC, so you should plan ahead to avoid penalties and ensure a smooth process.

• Tax Year-End: Consider aligning the conversion with your tax year-end for easier reporting and to prevent mid-year tax issues. A tax professional can help identify the best timing.
• State-Specific Deadlines: Some states set specific deadlines for conversions. Check your state’s rules to stay compliant.
• Preparation Time: Converting involves legal work, tax planning, and restructuring, so give yourself enough time to avoid last-minute errors.

C Corp to LLC Conversion Cost: How Much Needs to be Spent?

Converting a C Corp to an LLC involves several key expenses, and the exact amount can vary based on state requirements and business specifics.

• Filing and Administrative Fees: States usually charge a filing fee to process the conversion, along with potential document fees. These can add up to a few hundred dollars, depending on state regulations​.
• Professional Services: Consulting legal and tax professionals is highly advisable, as they guide you through complex steps and help avoid errors. Attorney fees can vary from a few hundred to several thousand dollars, depending on the complexity of the conversion and any legal issues that may arise.
• Tax Liabilities: Transferring assets to an LLC often creates tax obligations since the IRS treats it as a “liquidation,” taxing both the corporation and shareholders, making it potentially costly, especially for profitable businesses​.

Challenges and Risks of Converting a C Corp to an LLC

Switching from a C Corporation to an LLC has unique challenges, so it’s essential to be aware of them before proceeding.

• Tax Consequences: The conversion can trigger significant tax liabilities, often treated as a liquidation, which may result in double taxation—both for the corporation and shareholders.
• Ownership Limitations: Unlike C Corps, LLCs may have limited options for equity financing, which could impact your ability to attract future investors or raise capital.
• Complex Legal Process: The conversion involves intricate legal requirements, including restructuring ownership and filing specific documents, which vary by state and require careful planning.
• Potential Loss of Benefits: C Corps enjoy certain tax and employee benefit advantages, which may be lost after converting to an LLC.

Get Help

Overwhelmed? Confused? Don’t worry; Business Globalizer can guide you through the hassling procedure of C Corp to LLC conversion. You just have to reach out to us, and we can talk first to determine your corporate agenda. After the determination, you just sit back and relax; everything will be done with proper compliance.

• Avoid double taxation with LLC pass-through taxation.
• LLCs have simpler management—no board or annual meetings.
• Conversion options depend on state regulations.
• LLCs allow flexible profit distribution but may limit capital raising.
• Conversion may trigger taxes on asset transfers—consult an advisor.
• Each state has unique regulations and deadlines.
• Costs include filing fees, professional services, and transfer taxes.
• Converting may mean losing C Corp tax credits and benefits.
• Consulting tax and legal experts ensure a smooth process.

FAQ

Q1: Is There Any Specific IRS Form to Convert C Corp to LLC?

Answer: As I mentioned in the blog, converting a C Corporation to an LLC doesn’t involve a specific IRS form. Only state-specific and some IRS-required documents are needed here.

Q2: C Corp to LLC Conversion in California: Is it Possible for My Business?

Answer: Yes, California allows corporations to convert to LLCs. To make the switch, you’ll need to file the required conversion forms with the California Secretary of State, and there’s a $150 filing fee as of January 2024.

Q3: How to Convert C Corp to LLC in Delaware?

Answer: Converting a C Corporation to an LLC in Delaware is fairly simple. First, you’ll need approval from your board of directors. Next, prepare your LLC’s internal documents, settle any outstanding franchise tax for your corporation, and file the necessary paperwork with the Delaware Secretary of State.