Converting from LLC to C Corp: Key Benefits and Tax Implications Explained

Wajiha Danish | June 12 2024

When considering a business restructuring, it is critical to understand the tax consequences of converting an LLC to a C corporation. Due to its flexibility, an LLC is an attractive option for first-time business owners.  

However, as a company expands, switching to a C Corporation can have several benefits. In this blog, we’ll go over the main advantages and financial consequences of this conversion. 

Why Convert Your LLC to a C Corporation? 

Can you convert LLC to C Corp? Absolutely! Although the procedure is simple, careful preparation is necessary to prevent unnecessary tax expenses. Companies usually take this conversion seriously for a variety of reasons, including attracting investors, offering stock options, and taking advantage of any possible tax advantages. 

Key Benefits of Converting to a C Corporation 

Here are some of the benefits you can enjoy when converting from an LLC to a C Corporation; 

1. Acquiring Capital 

Investors with venture capital and institutional financiers consider C corporations enticing. C Corporations are a better alternative because they can grant stock options and issue different classes of shares. 

Moreover, converting to a C Corporation is also necessary if you intend to pursue an Initial Public Offering (IPO). LLCs do not possess the right to go public, so this is the only way you can do so.  

2. Tax Benefits 

Profitable companies might consider it beneficial for C Corporations to enjoy a flat corporation tax rate. This rate is usually lower than the highest individual tax rate that members of an LLC would pay under existing tax legislation. 

C Corporations also have the choice to keep all their earnings within the organization, unlike LLCs, which distribute all revenue to members. As a result, investing in business growth is possible without having an instant unfavorable tax impact on the owners. 

3. Employee Incentives 

Giving top talent stock options can be an extremely successful approach to attracting applicants and retaining them. A higher-caliber workforce finds C Corporations to be more desirable employers since they can offer stock options more readily than LLCs. 

Tax Consequences of Converting an LLC to a C Corporation 

Making the right decision requires understanding the tax repercussions of changing an LLC to a C corporation. It is essential to be ready for multiple tax events initiated by the conversion procedure. 

1. Possibility of Double Taxation 

Double taxation applies to corporations, which means that in addition to paying taxes on its profits, shareholders must also pay tax on dividends received. This is a substantial change compared to an LLC’s pass-through taxes, where income is taxed once at the member level. 

2. Appreciated Assets 

Upon conversion, the LLC may be required to pay taxes on its appreciated assets. The IRS treats the conversion as an asset sale, potentially subjecting the LLC to capital gains tax. 

3. State Tax Factors to Take into Consideration 

Each state has different laws governing the transition of LLCs to C Corporations. It is important to speak with a tax expert educated in state laws, as certain states may charge additional taxes or fees throughout the conversion procedure. 

Convert LLC to S Corp: Tax Consequences

Convert LLC to S Corp Tax Consequences

Tired of typing in “convert LLC to S Corp: tax consequences” without coming up with a useful result? Here’s information that can prove useful.  

Choosing to become an S Corporation as an alternative to a C Corporation should involve first understanding the fiscal implications. This transition offers distinct benefits as well as drawbacks. 

1. Pass-Through Tax 

An S Corporation enjoys the same pass-through taxation advantages as an LLC, meaning income is only subject to individual taxation. In order to prevent the double taxation that C Corporations experience, this can be helpful. 

2. Restrictions for Stockholders 

S Corporations are not allowed to have more than a certain number or kind of shareholders, which can hinder companies trying to grow or attract a variety of investors. 

3. Taxes on self-employment 

Corporations can lessen the burden of self-employment taxes by allowing shareholders to pay themselves fair compensation and receive additional earnings as distributions—which are exempt from self-employment taxes. 

When you convert LLC to S Corp, tax consequences can rear their ugly heads and make the conversion prove dangerous. However, with an expert guide by your side, it can be quite easy to make a successful shift.  

Here are some questions we usually get from our clients when they are looking to make the shift;   

Frequently Asked Questions 

1. How does one go about converting an LLC into a C Corporation? 

Usually, the procedure entails: 

  • Board and Member Approval: The conversion requires the LLC’s members’ consent. 
  • Articles of Incorporation Submission: The state where the business is registered must receive your articles of incorporation. 
  • Creating Bylaws: Draft the new C Corporation’s bylaws. 
  • Issuing Stock: Give the original shareholders stock certificates. 
  • Obtaining an EIN: Get an Employer Identification Number (EIN) for the C Corporation if you don’t already have one for the LLC. 
  • Informing the IRS: To designate the entity as a corporation for tax purposes, file Form 8832. 

2. Will my current contracts change if I become a C Corporation? 

Your conversion to a C Corporation should not immediately impact your current contracts, but it is still a good idea to review each one. It is recommended that you seek legal advice to ensure compliance with any agreements that may contain provisions related to changes in the company’s framework and to prevent any potential breaches. 

3. What effect will the conversion have on my individual tax return? 

You record your portion of the LLC’s gains and losses as a member on your individual tax return. The firm income becomes subject to corporate taxes through its conversion to a C Corporation. Only dividends and salary received from the firm will be reported by shareholders, which may change how your income is taxed and perhaps lead to a lower overall tax burden if managed correctly.  

4. What regulations must a C Corporation keep an eye out for? 

Compared to LLCs, C Corporations are liable for stricter compliance obligations, which involve: 

  • The process of submitting annual reports to the state. 
  • Organizing and recording regular board meetings. 
  • Maintaining thorough documentation of every corporate action. 
  • Ensuring that personal and business funds remain completely distinct. 

5. If necessary, is it possible to undo the conversion? 

It is possible to reverse the change from a C Corporation to an LLC, but it can be difficult and expensive. The procedure entails creating a new LLC and dissolving the C Corporation. When implementing such a big shift, it is imperative to consider the advantages and disadvantages carefully and get advice from a tax expert. 

6. Which benefits are affected by the conversion for employees? 

If you convert to a C corporation, you may be able to provide competitive employee perks, such as stock options and other retirement plans. By structuring these incentives in a way that works for them, C corporations can more effectively draw in and retain great talent. 

LLCs provide less formal governance frameworks and greater managerial flexibility. With a board of directors and officers, C Corporations, on the other hand, have a more rigid structure that can offer formal decision-making procedures and increased accountability. 

7. Is it possible to expand a firm internationally by converting to a C Corporation? 

Yes, because they can manage complex international tax regulations and raise finance more successfully, C Corporations are frequently better positioned to expand their businesses internationally. They also give foreign investors a more recognizable structure. 

8. What should I do if I’m unsure about converting? 

If you’re unsure whether to convert your LLC to a C corporation, consider speaking with a tax professional or business consultant. They may offer personalized guidance based on your unique business objectives and circumstances. 

Final Thoughts 

Although you might be focused on answering the question, “can you convert LLC to C Corp,” the most important concern should be making the final decision of whether you should transition or not. 

Understanding every aspect of LLC business structures is essential when deciding whether to convert your Limited Liability Company (LLC) to a C Corporation. You must weigh all the benefits against its tax implications.  

Although the tax consequences of converting an LLC to a C Corporation definitely require thoughtful consideration, businesses can easily manage this transition and take advantage of the many opportunities it offers with meticulous planning and expert assistance. 

Thus, consulting with an experienced tax counselor or legal expert before making any final decisions is essential. Considering your company’s particulars, their knowledge and customized recommendations can help clarify the best course of action.  

Read other related resources:

How To File Taxes For An LLC In The U.S – Things To Know

What is LLC Accounting? Here’s Everything You Need to Know

S Corporation Vs LLC: Differences & Benefits

Author Bio

Wajiha is a Brampton-based CPA, CGA, and Controller with 17+ years of experience in the financial services industry. She holds a Bachelor of Science Degree in Applied Accounting from Oxford Brookes University and is a Chartered Certified Accountant. Wajiha spearheads Monily as its Director and is a leader who excels in helping teams achieve excellence. She talks about business financial health, innovative accounting, and all things finances.