What is a C Corp Conversion?
A C Corp conversion is the process of changing a business entity into a C Corporation. The primary business is usually an S Corp or Limited Liability Corporation (LLC).
There are various reasons why companies might want to become a C Corp, but there are consequences to know about.
Read the rest of this article to learn about how to navigate a C Corp conversion and what to consider before beginning the transferring process.
What are Some Benefits of C Corp Conversions?
There are various advantages of switching to a C Corp. These include:
- Lower tax liability. A C Corp has the potential for lower overall tax, such as by retaining earnings in the company so you invest in your business growth.
- Fewer restrictions when raising capital. For example, C Corps don’t have the same restrictions as S Corps when raising money.
- More access to investors. Some investors prefer C Corps to S Corps because they enable complex stock structures.
- Global scale. If you want to engage in foreign business operations, transforming your LLC to a C Corp could benefit you because some non-U.S. countries are more familiar with them.
How Do You Convert an LLC to a C Corp?
Converting an LLC to a C Corp can be tax-free under IRC Section 351, provided it’s correctly structured. There are three ways to convert your LLC into a C Corp. These are statutory conversion, statutory merger, and non-statutory merger.
Statutory Conversion
This is a common strategy for C Corp conversion. It involves the following steps, and you don’t have to dissolve the LLC:
- Get member approval. Your members will have to approve and sign a conversion plan document.
- File certificates. You have to file a Certificate of Conversion and Certificate of Incorporation with the Secretary of State. There will be a fee included for filing these documents.
- Convert the membership interests into corporate shares. These are typically converted proportionally to the members’ ownership percentages in the LLC.
Note: In some U.S. states, statutory conversions aren’t permitted, so you’ll have to consider other methods of converting your LLC into a C Corp.
Statutory Merger
In this transfer method, you’ll have to dissolve the LLC after converting it to a C Corp. Here is what you will do during the conversion process.
- Create a C Corp in your state. File documents such as the Articles of Incorporation with your Secretary of State. You’ll also have to hire a registered agent.
- Get member approval. All members in your LLC need to be on board with the conversion.
- File a Certificate of Merger. This will be filed with your Secretary of State.
- Transfer assets to the C Corp. All assets and liabilities must be transferred to the C Corp, which happens automatically (via operation of law) after the merger.
- Dissolve your LLC. File a Certificate of Dissolution to dissolve the LLC.
Non-Statutory Merger
This is known as the most complex of the three processes. How it works is that you form a new C Corp, then transfer LLC assets and liabilities manually. It typically involves the following:
- Form a C Corp. File Articles of Incorporation with your Secretary of State, choose a registered agent, and draft your corporate bylaws.
- Get member approval. As with other processes, your members need to be happy with the transition.
- Transfer assets manually. You’ll have to transfer these yourself with the use of legal documents.
- Change members to shareholders. Your LLC members will have to receive equity stakes in the C Corporation.
- Dissolve the LLC. You’ll need to file a Certificate of Dissolution so that your LLC doesn’t exist as a business entity anymore.
How Do You Convert a S Corp to a C Corp?
If you want to convert your S Corp to a C Corp, perhaps because you want to make use of lower taxation, you will need to declare that you are choosing to set up a C Corp.
What’s included in the statement:
- You’ll explain that the corporation is revoking its election that taxes it as an S Corp.
- Shareholder names and addresses.
- How many shares of stock are owned by the shareholders.
- The revocation effective date.
- Approval and signature of the shareholder(s) who own(s) over 50 percent of the corporation will be attached to the statement.
Although the process is pretty straightforward, there are some things to bear in mind so that you complete it accurately.
- Your business has a specific deadline by when you have to share earnings with shareholders. This will take place after the process has closed. If you miss this deadline, your distributions might be taxed as dividends.
- You might want to avoid converting from an S Corp to a C Corp halfway through the year as this could cause you to file two tax returns.
How Can a Lawyer Help You With a C Corp Conversion?
Before you transition from an LLC or S Corp into a C Corp, you should consider hiring a lawyer. They will help you through all stages of the process, while also assisting you to evaluate if the conversion is a wise decision for your business goals.
Here’s how a lawyer will help you:
- They’ll help you select the best conversion method, depending on what’s allowed in your state.
- They’ll consider all state and federal tax implications.
- They’ll submit all the filings you require on time.
- When getting member approvals, a lawyer can help you follow the correct voting procedures to prevent disputes in future.
- They’ll update all your business documents to align them with the appropriate rules and laws.
- They’ll minimize your liability risks, while coordinating with tax advisors.
Do you need to hire a lawyer for help with a C Corp?
If you need to hire a lawyer for help with a C Corp, you can find a reputable one on ContractsCounsel, an online legal marketplace where clients can hire vetted lawyers. Find the best lawyer for your legal requirements by reviewing lawyer profiles according to factors such as their expertise, credentials, client ratings, and years of experience.
