An LLC can become a C corporation after formation, but it is not an "automatic" process. Also, you need to get some answers before you take action to avoid any unwelcome surprises and tax consequences. Be aware, however, it is not as simple as just "becoming" a C corp. There is no automatic "conversion" feature. Always find up-to-date information or get advice from an expert as state regulations and tax laws can change.
Fit your business needs with the right LLC package
New Corporation Documents
Forming a corporation involves preparing and submitting required documentation. You'll need to file at least two formal documents with your state of incorporation. The articles of incorporation contain all of your business's pertinent information -- name, address, registered agent data, purpose of the business, and stock information including the number of authorized shares and price -- needed to identify the foundation of the business. You'll need to prepare and submit your corporate bylaws, which describe the operating rules for your new business.
You must choose a name permitted by your state. Ideally, you can have a name identical or similar to your LLC name, changing only the "LLC" to "Inc.," "Corp.," or "Ltd.," which must follow the name. There are no guarantees that your preferred name is available or permitted, however. You must appoint a board of directors and hold and record a first meeting. You must also issue stock certificates to the original shareholders of the company. Send in your state incorporation fees -- usually around $100 to $300 -- with your articles of incorporation and bylaws.
Converting from an LLC to a corporation delivers some good tax news initially. There are no unpleasant tax consequences if the value of LLC assets has increased since formation when you convert your business to a corporation. However, a C corporation is liable for federal and state income taxes on its annual net profit, unlike an LLC, if you've chosen to be taxed as a sole proprietorship, partnership, or S corp. Corporate tax rates are usually higher than personal tax rates, so you'll lose this advantage. Double taxation also can occur if your C corporation pays dividends to shareholders, since this cash comes from net profit, which has already been taxed.
You should have valid reasons for changing from an LLC to a C corporation. Consulting with an experienced corporate attorney or accountant before filing for the conversion. For example, if your company needs growth money from new investors or venture capital companies, you might decide that a corporation is a better "vehicle" to attract funds, with your ability to offer stock easily. While this may be a good reason to convert, the typically higher costs to create a corporation may pose challenges. Expert advice helps you better determine the wisdom of moving your LLC to a C corporation.
References & Resources
- Jupiterimages/Photos.com/Getty Images