How to Convert an LLC to a Corporation

By Jennifer Kiesewetter, J.D.

How to Convert an LLC to a Corporation

By Jennifer Kiesewetter, J.D.

At the time you created your business, an LLC was the right choice. The LLC business structure benefitted your new company with the flexibility of governance, liability protection, and pass-through taxation. However, situations change. Your business may have grown exponentially. Your business may benefit from different management and tax structures. Your company may benefit from offering a different benefits package. Maybe it's time for you to convert your LLC to a corporation.

Two businesspeople looking at a desktop computer together

LLC vs. Corporation

Before you convert your LLC to a corporation, you need to understand the impact on your company.

The IRS taxes LLCs and corporations differently. LLCs typically have pass-through taxation: the LLCs' members report profits and losses on their personal tax returns. You can elect S corporation taxation, which also has pass-through taxation, or C corporation taxation, with has separate entity taxation.

If the LLC converts to a C corporation, the business files a separate tax return that documents profits and losses instead of passing them through to the owners' tax returns. Often referred to as "double taxation," this scenario involves the business reporting its profits and the owners reporting their earnings, each on separate tax returns. However, if your business grows at a rapid clip, reporting earnings on a business tax return could be beneficial, as those profits would fall into a lower income tax bracket.

Additionally, LLC members aren't typically considered employees for purposes of payroll. Thus, the company doesn't withhold employment taxes and federal income taxes from any draws taken to pay personal expenses. Those members must pay self-employment taxes quarterly.

However, corporations can pay owners of the business a salary that's subject to employment taxes and federal income taxes. The business categorizes any profits as distributions as opposed to salary. Distributions aren't subject to the same taxes. With the help of an experienced accountant or attorney, you can set salary and distributions to lessen the tax burden for owners of the business.

Finally, certain employee benefits are available for corporations rather than LLCs. Further, certain employee benefits, such as health benefits, life insurance benefits, and health savings accounts contributions, have more favorable tax treatment for owners of corporations than owners of LLCs.

Conversion to a Corporation

To convert an LLC to a corporation, you can choose from three different conversion methods. These methods vary by state, and you should handle each method according to your state's laws.

Statutory Conversion

A statutory conversion is a streamlined approach to convert your LLC to a corporation. It allows your LLC to convert to a corporation, causing your LLC members to become shareholders of the corporation and allowing the LLC's assets and liabilities to become assets and liabilities of the corporation. No formal agreements are required to create this conversion. Not all states permit statutory conversions, so check your state law.

To perform a statutory conversion:

  1. Obtain the appropriate forms from the Secretary of State's office.
  2. Gather the necessary information and complete the paperwork. The forms require the company name, employer identification number (EIN), and registered agent's name.
  3. Sign the forms.
  4. File the forms with the Secretary of State and pay the required filing fee, which differs by state.

Statutory Merger

A statutory merger involves merging your LLC with a corporation instead of converting your LLC into a corporation. To complete a statutory merger:

  1. Create a new corporation.
  2. Vote to approve the change from membership to shareholders. With this step, membership shares legally become corporate shares.
  3. File a certificate of merger with the Secretary of State and pay any applicable filing fees, which differ by state. Completing this process dissolves the LLC.

Nonstatutory Conversion

A nonstatutory conversion is an expensive and complicated way to convert your LLC into a corporation. To complete a nonstatutory conversion, the members must assign the LLC's membership interests, assets, and liabilities to the new corporation through a series of legal agreements. Although the LLC members agree upon becoming corporate shareholders, they must purchase their interests in the new company. After the conversion is complete, the LLC dissolves.

Completing Your Conversion

After you complete the process of your conversion, remember that you need to draft and file articles of incorporation for your new company with your Secretary of State. You also need to:

  • Obtain a new EIN for the corporation
  • Draft corporate by-laws
  • Elect officers
  • Appoint directors
  • Create stock certificates
  • Hold an initial board and shareholder meeting
  • Establish the appropriate corporate processes so you can resume conducting business as soon as possible

When converting your LLC, many questions can arise. You may find that you have questions about what type of conversion you should choose for your LLC or what corporate processes you need to establish. Hiring an attorney or using an online service provider to assist you in answering any questions you may have can save you time and money and allow you to proceed with confidence.

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.