Can an LLC Become a C Corporation Years Later?

By William Pirraglia

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.

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.

Additional Requirements

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.

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Tax Considerations

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.

Considerations

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.

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S Corporation Conversion to LLC

References

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The Cost of Forming an LLC

Because LLCs (limited liability companies) are creations of the state rather than the federal government, official costs to form an LLC vary. Most states charge fees that are similar to the charges for registering a new corporation. Some states, however, choose to set their fees notably less or more than new corporation costs. You may also face other expenses for retaining expert assistance from an experienced attorney and/or accountant to set up your LLC properly.

The Steps in Starting an S-Corp

An S corporation is simply an ordinary corporation that has elected to be taxed under Subchapter S of the Internal Revenue Code. To start an S corporation, you must form a corporation that qualifies under IRS rules and then apply for S corporation status with the IRS. The IRS routinely approves applications from qualified entities. Limited liability companies may also elect to be taxed as S corporations if they qualify.

Can You Fill Out a 2553 Before the Articles of Incorporation?

A business entity that wishes to become an S corporation must file Form 2553 with the IRS. However, before a business can submit this form, it must first qualify for S corporation status and must file articles of incorporation with the state to incorporate the business.

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