How to convert an LLC to a corporation.
Converting an LLC to a corporation is the standard move when raising venture capital, planning a QSBS-eligible exit, or restructuring for international expansion. Three methods exist, each with different tax and complexity profiles. Most founders use statutory conversion where available. This guide walks through which method to use, the tax consequences, and the timeline.
Step by step.
Most LLCs converting to corporation become Delaware C-Corp (for VC compatibility) or home-state C-Corp. S-Corp election can follow if appropriate (US-only ownership, limited shareholder count).
(a) Statutory conversion: file one form, LLC transforms into corporation. Available in 36 states. (b) Statutory merger: form new corporation, merge LLC into it. (c) New corp + asset assignment: form new corp, transfer assets and liabilities. Used in states without statutory conversion.
Members must approve per operating agreement. Typically requires majority or supermajority depending on operating agreement terms.
Document the new entity structure, equity allocation (LLC membership percentages convert to share allocations), tax implications, and timing.
Statutory conversion: file Certificate of Conversion + Articles of Incorporation for the new corporation. Statutory merger: file merger documents. Asset assignment: form the new corp, then transfer assets via assignment documents.
Most LLC-to-C-Corp conversions qualify as tax-free under IRC Section 351 (if shareholders own 80%+ control after). Section 351 specifics depend on members and contributions; specialty CPAs handle this.
Bylaws, board of directors, officers, stock ledger, board meeting minutes. The corporation operates under different formalities than the LLC did.
New EIN if applicable. Bank accounts, payment processors, contracts, leases, vendor agreements all transfer to or are reassigned to the new entity.
What to avoid.
Delaware C-Corp is standard for VC-backed startups. Home state corp is often cheaper for non-VC-backed businesses. Choosing wrong adds franchise tax cost or VC friction.
Qualified Small Business Stock (QSBS) requires C-Corp formation before significant asset accumulation. Late conversion can disqualify QSBS treatment.
Section 351 tax-free treatment requires that pre-conversion owners own 80%+ control after. If new investors come in simultaneously with conversion and dilute below 80%, 351 fails.
LLC profits interests do not convert cleanly to corporate stock options. New equity plans (typically 83(b)-eligible restricted stock and ISOs) usually need to be created from scratch.
LLCs frequently distribute profits to members. C-Corps must run W-2 payroll for working owners. Payroll service needs to be set up before conversion completes.