How To Convert From A C Corp Structure To An LLC

C corporation (C corp) is a widely-used business structure in the U.S. following the numerous benefits to the owner and the organization as a whole. Despite its advantages, a few disadvantages of being a C corporation might lead the owner to convert it into a Limited Liability Company (LLC).

The decision to convert may come from various reasons. It could be to lower your tax burden or upgrade protection for liability and personal assets, or you simply want to reduce the paperwork you must do.

To guarantee a quick and efficient conversion process with the least stress, make sure you review your business’s current status and each state’s requirements before starting the conversion.

3 ways to convert a C corporation to an LLC

If you’re heading toward a change from a C corporation to an LLC, below are the three common ways to do it. Please be mindful that not all of these choices are approved in every state of the U.S.

Dissolving the corporation and forming a new LLC

This traditional method consists of two key steps: dissolving the C corporation and forming a new LLC. This process takes the longest to complete and might be subject to additional fees.

Generally, you will be going through 4 steps:

Step 1:  Form a new LLC

Step 2: Transfer assets and liabilities

Step 3: Exchange for LLC memberships

Step 4: Dissolve the corporation

There are exceptions, however. You can modify the process as required according to the current state of your corporation. Suppose that your corporation has no assets, forming the LLC and dissolving the C corp can happen simultaneously.

This may be the only option for states that don’t allow conversion. Also, if your corporation has significant operating losses or heavily depreciated assets, your state authority may not allow you to merge or directly convert to an LLC.

Merging of the corporation with the new LLC

Many states (e.g. Delaware, California, Texas, etc.) permit merging methods and impose specific requirements for this process. You’ll be asked to engage in a “statutory merger”, which involves creating a new LLC and merging the former corporation into that new entity.

The process will be consisting of the following steps:

Step 1: Establish a new LLC

Step 2: Prepare a merger agreement or plan

Step 3: Obtain C corp’s stockholders’ and LLC’s members’ consent to the merger

Step 4: Exchange shares of stock for LLC’s membership interests

Step 5: File a certificate of merger with the Secretary of State

Step 6: Dissolve the C corp after merging

This process is more complicated and costly compared to the direct conversion method, which we’ll discuss in detail below. For instance, the New York business corporation law and New York LLC law strictly regulate the merging of corporations into LLCs in New York.

Converting from a C Corporation into an LLC (limited to several states)

Statutory conversions are considered relatively new in the US. This allows you to convert a corporation to LLC directly instead of forming a new entity. To ensure a smooth transition, make sure you have the following in place:

• Have the current directors approve the conversion plan
• Conduct a meeting to request stockholders’ approval on the conversion
• File with the secretary of state’s office and pay the fees if any

Why should you convert a C Corp into an LLC

We summarize certain situations where converting into an LLC may benefit your business.

Situation 1: You run a small business and aim for an informal ownership structure

An LLC can have unlimited owners with no restrictions on classification or nationality. You also don’t have to take care of extensive paperwork and formalities. If you don’t require a formal corporate structure of a C Corp and would prefer to manage your business with more flexibility, then converting to an LLC may be beneficial for your company.

Situation 2: You want to take advantage of certain tax benefits

Converting a C corp into an LLC can potentially help you gain access to certain tax benefits.

LLCs are usually taxed more favorably than C Corps since their profits and losses can be passed through to the owners and members of the LLC, so they do not have to pay corporate taxes. This can help to reduce the overall amount you have to pay.

LLCs typically benefit from pass-through taxation so as not to pay taxes at the business entity level, unless you file a Form 8832 and affirmatively elect to be treated as a corporation.

Situation 3: You would like more control over management decisions

LLCs provide their members with more control over the management decisions of the business, as members typically have the right to make day-to-day decisions without consulting with other owners.

This can be advantageous if you want more autonomy over operations and don’t need a board or shareholders to approve of essential decisions like a C corp.

Situation 4: You want to be independent of investors

If you convert from a C corp to an LLC, you will be free from investors’ or shareholders’ oversight and potential interference.

In a C corp, investors may have a say in major decisions and can influence the direction of your business. Converting to an LLC will limit their influence, allowing you to remain independent while still having access to capital.

If any of these situations apply to you and your business, then converting from a C Corp to an LLC may be the right choice for you. Before making any decisions, it is best to consult with legal or tax professionals as they can provide customized advice on what structure is best for your company.

Potential consequences when converting into an LLC

When converting from a C Corporation to an LLC, you must be aware of the possible consequences that may arise.

• Conversion cost & changes in tax structure

It is also important to keep in mind that the conversion process may come with added costs, depending on the state you are operating in. Additionally, the tax structure of your business may change when converting to an LLC.

• Limited investment option

LLCs tend to provide limited investment options for members, as the structure does not offer shares that can be bought and sold on the public market. This means that you may not be able to raise capital as easily as you could with a C corp structure.

• Risks of freedom granted in LLC

Finally, it is also important to consider that the freedom granted with an LLC structure may come with some risks. Since members have more autonomy over the business, they may also be more exposed to liabilities.

For instance, members may not be required to hold regular meetings or keep minutes, which could lead to mismanagement and at times legal disputes with creditors or investors.

Conclusion

In conclusion, converting from a C Corp to an LLC can provide many benefits for businesses looking for flexibility, tax savings, and more control over operations. However, weighing the potential risks and costs associated with this transition is important before making your move.

By understanding the advantages and challenges associated with converting from a C Corp to an LLC, you will be able to make an informed decision for your business.

If you have any questions or concerns regarding the conversion process, don’t hesitate to talk with our consultant via service@bbcincorp.com for practical advice.