Reasons to Transfer a C-corporation Into an LLC

by Jeff Clements
Choice of entity is an important part of setting up a new business.

Choice of entity is an important part of setting up a new business.

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An important decision that must be made early on by an entrepreneur is the choice of business structure. This can dictate the degree of formality of the business, affect its tax burden and have management implications. However, if circumstances change after the initial choice or another structure would serve his interests better, the owner can change his business's structure.

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Tax Treatment

Under IRS regulations, a C corporation is taxed on its earnings and profits as a company; then, any dividends paid out to its shareholders are taxed at the individual level. This so-called double taxation is an important factor in selecting a form of entity for many businesses. Other business structures, such as the limited liability company, can result in a lower tax obligation because there is no tax at the entity level. An LLC's earnings and profits are allocated directly to the individual owners, called members, and taxed only once.

Simplicity

Although they are subject to state law, generally LLCs do not have the same regulatory requirements as corporations. This means that members of an LLC do not have to maintain minutes of corporate shareholder meetings or nominate a board of directors. This relative simplicity can allow the owners to concentrate more on the actual operations of the business rather than administrative formalities.

State Fees

Some states assess nominal fees on corporations based on the total number of shares outstanding while other states assess franchise fees (annual filing fees) and other similar charges. LLCs can often avoid these types of assessments since they are not corporations and are typically treated as disregarded entities for income tax purposes.

Management Control

An LLC has many attributes of a partnership which make it an attractive choice over a corporation. Notably, it does not have to appoint a board of directors (it has managing members), and although it has members (owners), it does not have shareholders like a corporation. Furthermore, LLC owners have the right to negotiate internal management procedures among themselves, typically outlining them in an operating agreement. This is another reason why many small businesses choose to operate as an LLC instead of a C corporation.