An LLC can become a corporation. You can convert the LLC to a corporation if the other members of the LLC agree. Some states have a fast and painless procedure for converting your LLC to a company. Some states’ procedures are more complicated, taking more time and documentation.
Changing the company structure would have implications, both positive and negative. Examine the functional discrepancies between the two company groups, such as reporting standards, taxation, and corporate formalities, before making the switch. If you don’t like what you hear, you can adjust the company’s tax status instead of converting to a corporation and keep your business structured as an LLC.
Differences and Similarities Between LLCs and Corporations
Before converting your LLC to a corporation, make sure you understand the implications of the new structure. First, consider the parallels between the two. Both LLCs and corporations are separate legal entities from their owners. And they do not exist until the owners file the necessary paperwork.
These companies, unlike sole proprietorships and partnerships, can own assets and incur liabilities. Corporations and LLCs both provide limited liability protection. It means that the owners are typically not personally liable for the business’s debts and obligations.
Complexity in management
Corporations have a more rigid management structure than LLCs. The LLC owners (referred to as “members”) manage the business, or they may hire a third party to handle the day-to-day operations. Your state may require LLCs to file annual reports, but the reports’ content is limited to basic details such as the company address and registered agent.
Managing a company is more structured. The formalities include holding daily meetings, taking minutes, keeping notes, and submitting annual reports. According to state law, corporate annual reports must provide comprehensive details about the company and its finances.
Taxation
When it comes to taxation, LLCs have advantages that companies do not. By design, LLC owners register and pay taxes as sole proprietorships or partnerships. A company, on the other hand, must pay taxes as a C Corporation or an S Corporation. A-C Corporation faces “double taxes.” The corporation pays corporate tax on income that enters the company. After distributing the profits, the owners and shareholders pay taxes on the same income on their personal tax returns a second time.
Reasons to Convert from a Limited Liability Company to a Corporation
Now that you’re aware of some of the practical implications of converting, rethink if you still need to become a company. Changing a company’s structure to a corporation may be advantageous for certain businesses, but it is not for all. If you need funds, you’ll find that investors tend to deal with companies because it’s easier to sell stock in a company than it is to pass ownership in an LLC. Creating a business requires you to issue stock and “go public” with the company. It helps you to expand the company by selling shares to the general public.
If you do not wish to draw investors or go public, the challenges of transforming your LLC and sustaining a company are unlikely to be worth the effort. It is not necessary to alter the structure of your company in order to expand or increase revenues, and many large and profitable businesses continue to function as LLCs.
Understanding the Various Conversion Types
If you’ve agreed that converting your LLC to a company is a smart idea, here’s what you’re in for. The paperwork and procedure for converting your LLC will be determined by the laws of the state in which your company was created. In all states, the LLC members must support the transition. And develop a transfer plan outlining how member ownership will be converted into shares of stock. Following conversion, the members become shareholders of the company, and the owners transfer all of the LLC’s properties and responsibilities to the corporation. The three conversion options are as follows:
Statutory Conversion:
Some states permit “statutory” conversion, which applies to a statute that establishes a simplified procedure for modifying the business structure. In states where this option is available, you can convert an LLC to a company by filing conversion forms with the Secretary of State. The state dissolves the LLC and passes debts and responsibilities to the company until the Secretary accepts your filings. To form the company, you do not need to file any additional paperwork.
Statutory Merger:
If your state forbids conversions, you might be able to seek a merger, which is a more complicated procedure. To begin, you create a new company and add your LLC members as shareholders.
Non-statutory merger:
In this case, you do not use either of the state-mandated procedures. Instead, you create a new company, distribute corporate stock to LLC members, move LLC properties, and then dissolve the LLC. Since shifting assets and liabilities can be complicated, it is best to consult with an attorney before pursuing a non-statutory merger.
Steps to Form a Corporation That Are not really Needed
If you seek a conversion or a merger, you must first create a new company, which includes
- establishing corporate bylaws.
- conducting an introductory board meeting, and
- issuing stock certificates
- requesting a new Employer Identification Number (EIN).
When the corporate conversion is complete, you will be expected to conform to new corporate formalities, such as conducting daily meetings of directors and shareholders, maintaining corporate minutes, and filing annual reports with the state.
The Tax Implications of Converting from an LLC to a Corporation
In certain instances, the company would not owe taxes as a result of the conversion. However, if you move all or less than all of the assets of the LLC to the company, or if the members of the LLC are not owners of the new corporation, you might be subject to additional taxes and filings. To assess your reporting conditions, consult with an accountant or a tax attorney.
Changing the Tax Status of the LLC
Instead of converting your LLC to a corporation, you can elect S Corporation or C Corporation tax status by filing paperwork with the IRS. You will still run your company as an LLC under this option, but you will pay taxes as a corporation. Although you will not be able to issue stock or go public as a result of this. You will be able to reap the advantages of corporate taxes, such as avoiding self-employment tax on a portion of the company income.
So, it can be concluded that the LLC can become a corporation. It has its own advantages and disadvantages that matter from company to company. The LLC can either change to S- corporation or to C corporation. There are three methods of conversion and some additional steps involved.
