Can an LLC Become a C Corporation Years Later?

By Ari Mushell, J.D.

Can an LLC Become a C Corporation Years Later?

By Ari Mushell, J.D.

You currently operate an LLC that has been in business for many years, but you've begun to contemplate transitioning the business from an LLC to a C corporation. In general, it's possible to convert an LLC to C corporation, which can provide the business with certain advantages.

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Prior to 1958, Americans who started businesses had two choices: a sole proprietorship or a C corporation. A sole proprietorship did not provide limited liability protection but was taxed only at the personal level. A C corporation provided limited liability but disadvantaged owners with double taxation, a scenario in which both the business and the individual pay taxes on profits. Congress created the S corporation in 1958 so business owners, especially small-business owners, would have the option of owning an entity that has limited liability protection while not being subject to double taxation. Starting in Wyoming in 1976 and eventually spreading to all states, LLCs now provide business owners with the tax benefits of an S corporation and a simplified formation process.

Advantages of a C Corporation

Although C corporations are subject to double taxation and have more regulatory requirements, it may still be advantageous to convert your LLC into a C corporation, which has a lower risk of government audit than LLCs and can raise capital by issuing shares in the company on the open market. LLCs have no such option.

In some circumstances, a C corporation can provide its owners with a tax advantage over an LLC. For taxation purposes, an LLC is a pass-through entity, meaning that profits and losses pass from the business through to the members, who pay personal income taxes. If an LLC is profitable and the income passes straight to the member, that member's tax obligation can climb into a higher bracket.

A C corporation does not have automatic pass-through taxation, so an owner/employee can structure payment to himself in a way that does not push his tax status into a higher bracket. As a result, the individual would gain, despite double taxation, because the tax liability of an owner/employee for corporate tax plus personal income tax is still less than that of an LLC member whose pass-through taxation lands him in a higher tax bracket.

Filing for C Corporation Status

Note that converting from an LLC to a C corporation is not like the process for filing an LLC. Filing for an LLC requires drafting articles of organization and an operating agreement, filing paperwork with the state agencies that regulates businesses—usually the Secretary of State—and paying the appropriate fees. The owners of the LLC, called members, are free to operate the business as they see fit. In most states, an LLC would also be responsible for paying a yearly fee to the local Secretary of State.

Filing as a C corporation requires more steps. Besides drafting articles of incorporation and an operating agreement and submitting the relevant forms and fees to the Secretary of State, incorporating as a C corporation involves:

  • Raising adequate capital in the corporation according to state law
  • Issuing stock to initial shareholders
  • Creating a board of directors
  • Scheduling regular board meetings
  • Recording minutes at the board meetings

If you operate an LLC, you can convert your business to a C corporation, even if your LLC is several years old. However, organizing as a C corporation is more complex. You should weigh the advantages and disadvantages of conversion and determine whether the formalities of operating a C corporation are right for you.

This portion of the site is for informational purposes only. The content is not legal advice. The statements and opinions are the expression of author, not LegalZoom, and have not been evaluated by LegalZoom for accuracy, completeness, or changes in the law.