How to Switch Entities From a C-Corporation to an LLC
Many businesses already in operation as a C corporation believe they would find it advantageous to convert to an LLC. Depending on the state you are in, conversion of a C corporation to an LLC can be more difficult than converting from a C to an S corporation, however. There may also be tax consequence that should be considered before beginning the conversion process.
Other People Are Reading
Things You'll Need
- General ledger for the C Corporation converting
- New tax ID number and bank accounts (if home state doesn't allow conversion)
Instructions
-
-
1
Check out the rules in your state. Some forms of businesses (such as professional corporations or one-member companies) are precluded from LLC status in some states. Make sure that an LLC is an option for your type of business before initiating a transfer.
Some corporation-friendly states (such as Delaware) make it easy to convert from a C corporation to an LLC. Most states don't allow C corporations to convert to an LLC at all, requiring the C corporation to cease existence and start-up the LLC as a new entity.
-
2
Evaluate the tax consequences of the intended transition. Transfer of assets from a C corporation into a newly-founded LLC can have significant adverse tax consequences if not done correctly. Competent legal and tax advice is extremely important before and during such a transfer.
-
-
3
If your state requires that you start a new LLC as the only means of conversion, file your LLC's articles of organization and operating agreement with the Secretary of State's office, and pay the filing fee (which varies from state to state). You'll also need a new tax identification number, new bank accounts, and new business stationary, among other things. If your state requires a merger as part of the transfer, merge your C corporation assets into the newly formed LLC. Once your assets are merged, dissolve the C corporation.
-
4
If your state doesn't allow a merger between a C corporation and an LLC, transfer the business assets from the C corp into the new LLC. Work with your lawyer and tax accountant to minimize the tax consequences of the transfer.
-
5
Set-up the new LLC in your Quickbooks, Peachtree, or other accounting software. Transfer the balances over, and begin record-keeping as a new LLC.
-
1
Tips & Warnings
Owners of an LLC cannot sell stock or provide employee stock options in the same way a C corporation can. If these items are a drawback to you, consider them well before making a transfer.
References
- Photo Credit businessman image by Christopher Hall from Fotolia.com
