3 Ways to Change Your LLC to a C Corp

An LLC is generally the best way to undergo incorporation if you’re a small business. However, an LLC’s potential to grow and obtain investor funding pales compared to a C Corporation.

Many business owners consider taking the next step to convert LLC to C Corp for the potential to transform their company into a future Fortune 500 candidate. While changing a business structure into a corporation is a bit complex, it can be worthwhile if your company aims to grow rapidly.

Key Takeaways

• A C Corporation is an excellent way to gain more investments for your business since it allows you to raise funds and sell company shares.

• Three methods allow you to convert an LLC to a C Corp, but you can also elect to be taxed as a C Corp while still being an LLC.

• The conversion process can be difficult and time-consuming, so ensure the new structure is in your best interest due to corporate double taxation and strict reporting requirements.

What Is a C Corp?

A C Corp is an incorporated legal entity that provides liability protection to its owners (called shareholders), who may or may not also be the company's employees. What sets a C Corporation apart from a small business is the requirement to form a board of directors to oversee the management and daily operations of the company.[1]

A corporation must hold regular meetings between the board of directors, management, and shareholders, with at least one annual meeting with the shareholders to formally record the company minutes. The board is also responsible for keeping the company compliant with state and federal laws and in good standing with the government.

A C Corporation is, by default, considered a separate legal entity from its shareholders by the Internal Revenue Service (IRS) and taxed independently from its owners.

C Corp vs. LLC

Before diving into how to change your LLC to C Corp’s more rigid structure, let’s look at an overview of some of the key reasons why you might make this step.

Growth Opportunities

An LLC is a relatively straightforward company structure where owners (members) own a share of the company and are usually actively involved in its management. In comparison, a C Corporation issues stocks (or shares) to its shareholders that can also be used to attract investments or even hire talent.[2]

Unlike with a limited liability company, where membership interests are typically fixed and can’t be changed easily, shares can be sold to third parties. The company can create a nuanced share system, combining common and preferred stocks to deliver the most profit to investors, management, and owners.

LLCs are considered small and not particularly reliable businesses for investment. This usually disqualifies them from obtaining any serious venture capital or significant loans. On the other hand, a corporation opens more avenues for getting your business funded.

Management

While a C Corp’s rigid management system might seem difficult to grasp at first glance, it’s arguably much easier to grow as a business under it. Due to the board selection process requiring shareholder approval and management requiring board approval, you’ll likely get excellent talent to guide you or help your company reach its peak.

Since a C Corp usually has many more members than an LLC, you will overall have less control over the business direction. However, that gets balanced out by the sheer quality and quantity of people hired to manage the company.

Tax Implications

An LLC is typically structured as a pass-through partnership or sole proprietorship (technically called a disregarded entity), making all members file income taxes based on their share of the company’s income. This is done through individual tax returns to the IRS.

In contrast, a C Corporation is a legal entity separate from its shareholders. Its income is taxed on the corporate tax bracket. After payroll and other settlements, the remaining profit is distributed among corporate shareholders based on the amount and type of shares they own. This allows a corporation to carefully organize its profit allocation system.

The corporate tax is steeper than the personal income tax bracket, and a corporation faces double taxation, first on the company level and then on the shareholder income from dividend distributions.[3] On the other hand, corporations get far more tax deductions and income opportunities.

If you’re a small company, the higher tax rate of a C Corp and the double taxation will make this model likely unsuitable. It’s best to consult an accountant to check how your tax will develop when you change LLC to C Corp.

However, you don’t have to change your business structure if you just want a different tax status. An LLC can elect to be taxed as an S Corp or a C Corp by filing Form 2553 or Form 8832 with the IRS, respectively.[4, 5]

How to Convert an LLC to C Corp

There are three main ways to convert an LLC to a C Corporation. They are not mutually exclusive, but the process you can take will largely depend on your state laws and regulations. Some states make the process relatively simple, while others might even force you to dissolve the company and create a new entity instead.

1. Statutory Conversion

A statutory conversion is the most straightforward way for entrepreneurs to change LLC to C Corp status. It involves filing conversion documentation directly with the Secretary of State office or the appropriate department of corporations.

However, not all states have a legal procedure for statutory conversion from an LLC to a C Corp. It’d be best to consult your state government websites and check whether they can supply the proper paperwork.

If a statutory conversion is possible, you must submit a Certificate of Conversion (or Articles of Conversion) or its analog in your state. You must also amend your Certificate of Incorporation or any other document you used during the LLC formation process.

Your company will also need to create and vote on a plan of conversion. Some states provide a template you can use, but you can also draft a plan with the help of a lawyer. Depending on where you live, the plan may or may not need to be filed with the state.

Your LLC’s operating agreement should contain membership rights and dictate what happens with the membership shares of members who didn’t agree to the plan.

Once filed, the state will convert your LLC into a C Corp, establish shares based on the Articles of Conversion you provide, and transfer all membership interests into those shares as well as any assets and liabilities that your LLC had prior to the process.

2. Statutory Merger

If a statutory conversion is not a viable option, a statutory merger is the next best thing. 

A statutory merger requires all members of the LLC to establish a new corporation by filing the Articles of Incorporation with the Secretary of State office, alongside paying the appropriate registration fees.

You will also need to develop an appropriate plan for merging to submit to the state and vote to agree on a possible merger.

Once the new corporation is registered, you must file a Certificate of Merger (or its equivalent in your state). When processed, the state allocates your LLC's assets and liabilities to the new C Corp. 

After that, you can dissolve the obsolete LLC by filing an Articles of Dissolution (or a similar document appropriate to the state).

The new business entity that you registered will inherit all of the previous LLC’s assets, but you will need to obtain a new Employer Identification Number (EIN) from the IRS.

3. Non-Statutory Conversion

If neither statutory conversion nor merger are available to you, the final option is to perform a non-statutory conversion.

This process is similar but more manual than a statutory merger. Your LLC members will need to create a plan of conversion, vote on it, and establish the new shareholder structure internally.

Then, you will need to register a new C Corporation with the state by filling out the appropriate Articles of Incorporation and obtaining licenses and a new EIN.

After that, you will need to have a corporate law attorney draw up legal agreements that transfer the LLC’s assets to the new C Corp and create stock certificates. The agreements essentially replace the process performed by the state during a statutory merger.

If the non-statutory conversion process fails, perhaps because some members don’t want to convert their membership interests into shares, then your LLC has no viable options for converting. You are best off dissolving the LLC, splitting its assets as they exist, and then reorganizing with willing members into a new C Corp that you form independently through state filing.

LLC to C Corp: Final Steps

After you change your LLC to a C Corp, the next steps ensure the corporation can function.

First, you'll need to draft your corporate bylaws, which will set up the process for electing a board of directors and then management.

With the new corporation set up, you will then need to ensure it’s in good standing by holding regular meetings with the board and investors and following the state’s reporting requirements for a corporation. These may be more taxing and require more administrative effort due to the stricter corporate structure, but they are absolutely vital to keep your business functioning.

FAQs

Can you switch from an LLC to a C Corp?

You can. However, the exact process will depend on your state’s requirements and available methods of conversion. In some cases, you may need to dissolve your LLC and create a new company.

How much does it cost to convert an LLC to a C Corp?

Considering all the filing fees required, converting to a C Corp can cost around $1,200. This will highly depend on where the business is registered.

Do you need a new EIN when converting an LLC to a C Corp?

If you perform a statutory conversion, no. However, you’ll need a new EIN if you perform a merger.

What form do I need to change my LLC to a C Corp?

You will need the Certificate of Conversion and updated Articles of Incorporation. Some states name these documents differently, so consult their resources for analogous forms.

What is the difference between an LLC and C Corp?

An LLC is a pass-through taxed entity owned by one or more people. A corporation is a separate legal entity from its group of owners (shareholders).

What is the process for converting an LLC to a C Corp?

The basic statutory conversion process involves filing the Certificate of Conversion. However, you may need to create a new corporation and perform a merger if the former is unavailable in your state.

How hard is it to convert an LLC to a C Corp?

It depends. A statutory conversion of an LLC to a C Corp is relatively straightforward, a merger is a bit more complex, and a non-statutory conversion can be incredibly time-consuming.

Should my LLC be taxed as a C Corp?

You can file Form 8832 with the IRS to allow your LLC to be taxed as a corporation. This doesn’t change your business structure. Whether this is advised is based on your finances and legal status and should be discussed with an accountant and attorney.

Bibliography

1. U.S. Small Business Administration. “Choose a business structure.” Accessed January 17, 2024.

2. Investopedia. “Shares vs. Stocks: What’s the Difference.” Accessed January 17, 2024.

3. Investopedia. “What Double Taxation Is and How It Works.” Accessed January 17, 2024.

4. Internal Revenue Service. “About Form 2553.” Accessed January 17, 2024.

5. Internal Revenue Service. “Limited Liability Company (LLC).” Accessed January 17, 2024.