The process of converting an LLC into a corporation varies depending on a number of factors. So, it’s extremely essential to understand every variable and its implications, otherwise, you might end up losing a lot of investment instead of any profits.
Following are the elements of conversions that you should be aware before forming a c-corporation online-
There are different ways LLCs can be taxed—as partnerships, corporations, and disregarded entities.
C and S-corporations are taxed differently.
There are different methods of converting your business such as statutory conversions, statutory mergers, and nonstatutory conversions.
You must always consult an expert before moving ahead for any kind of conversion.
The Procedure of Converting an LLC into a C-corporation
Step 1: Have the Knowledge About Your Tax Status
When an LLC is formed, you are required to pick your tax status. So, the type of tax status will determine the type of conversion one should opt for while converting.
By default, a multimember LLC is taxed as a partnership, and a single member LLC is taxed as a disregarded entity. So, which of the tax status you will fall into will be an essential factor while converting an LLC into a C-corporation.
Step 2: Choose From The Available Conversion Methods
The process of conversion varies from one state to another. So, it’s essential to go by your state laws. This is why it’s important to hire an agency or an expert to get all your paperwork sorted.
Also, Read- S-Corporation vs Sole Proprietorship
Below is the list of 3 primary conversion methods.
Statutory Conversion It involves filing some paperwork with the Secretary of State’s Office. You will be required to create a conversion plan and get it approved by all the members of your LLC.
In this process, your LLC will be converted into a C-corporation where the members will automatically become stockholders with assets and liabilities getting converting to that of a corporation. This is one of the cost-effective and easiest methods of converting an LLC.
This is more likely to be a formal process, unlike the statutory conversion. In this conversion, a new corporation is set up while merging the old LLC into it by filing for a certificate of a merger with the secretary of State.
For that, the company owners have to first pass a vote of approval both as members of LLC and as stockholders of a corporation. This process is a bit complicated, so requires consulting experts before starting a C-corporation.
This is the most complex and complicated among the three conversion processes. In this process, all the assets, interests, and liabilities have to be transferred from an LLC to a newly formed C-corporation using some legal formalities.
Step 3: Form a New Corporation
Step 2 is the most complicated as well as difficult step. Once that is complete, all you need is to ensure everything in the new corp. is set correctly.
Also, Read: Corporation vs LLC
Following are the requirements that need to be taken care of while converting your LLC into a C-corporation.
File for articles of incorporation or equivalent document with the Secretary of State.
An indication that you are converting your LLC into a corporation.
Drafting corporate bylaws
Electing Corporate officers and Directors
Holding a board meeting
It is essential to follow all the required steps and procedures to ensure your business does not get into any legal implications. Thinking of starting a C-corporation, make sure that your LLC must not have any ongoing contracts or agreements. Otherwise, all your efforts will be nullified.