How to convert your company from a C Corp to an LLC

September 24, 2021

It is super important for anyone forming a US company to have the right business structure.

For many entrepreneurs, that choice often comes down to registering a C-Corporation or a Limited Liability Company (LLC).

While both of them have their similarities, like the fact that they both protect the individual owners from being personally liable for anything that goes wrong with the company, they also have their differences and most entrepreneurs seek some guidance to help them pick the better option.

What the peculiarities of both structures mean for business owners though is that as the vision of their company evolves, there will be the need to switch to a different business structure that helps them achieve their new goals and earn the benefits that drew them to it.

This post will explain the process of converting your company from a C Corp to an LLC, but just before that, let’s share a few of the features of both company structures.

An LLC is a hybrid business structure that can be regarded as a sole proprietorship, a partnership, or even a corporation, especially when it comes to taxes. It is a business structure created under US state laws, which vary from state to state, so there isn’t just one set of rules.

Despite the fact that incorporating a company in the United States as an LLC makes the business registered an entity of its own, the Internal Revenue Service (IRS) will not consider it a separate entity for tax purposes - a process which is referred to as ‘pass-through taxation’ - and this contributes to LLC’s being famous for lesser paperwork.

Businesses registered as C Corporations operate in a different way. First, such companies pay a corporate income tax which is separate from the tax the owners have to pay for their share in the profits of the business.

To become an owner or member of a C-Corp, you have to buy shares in turn becoming a shareholder which entitles you to dividends which is a share of the profits made by the business.

This is what you as a shareholder pays your tax on, while the company pays their own portion. Already, you can see some form of complexity around that, which is something most C-Corp owners worry about.

In addition to this taxation difference and the paperwork that comes with it, management style is also a major factor why an entrepreneur might consider moving from a C-Corp structure to an LLC.

As a US company, C-Corp regulations require you to have a board, hold regular board meetings where you share updates, even draw up certain company by-laws. As an LLC, these steps are only encouraged, not mandated, and that flexibility can make all the difference.

Now that we know all about C-Corps and LLCs, here are the three ways you can switch your business structure from a C-Corp to an LLC to enjoy all the perks LLCs have to offer.

Statutory Conversion

This method is available across some states in the US and requires you to simply submit a single application to the Secretary of State’s office.

Now, while different states might have one or two extra forms they would request as part of your application, a standard application is expected to contain the following:

  • A form showing the conversion approval of your C-Corp board of directors
  • A plan of conversion
  • Approval from a majority of the shareholders of the company, and
  • A certificate of conversion, approved by the directors

In addition to these documents, the Secretary of State’s office might also request a certificate of formation for the new LLC as part of the conversion process.

Once all these documents are submitted and approved, the conversion takes effect, which immediately implies that shareholders in your C-Corp are now owners/members of your new LLC, as the C-Corp now ceases to be recognized as a legal entity.

This also means that you have successfully transferred all the assets and liabilities of your C-Corp to your LLC.

Statutory conversions stand out because of how simple and straightforward they make the process of converting from a C-Corp to an LLC.

It is also less expensive given that just one submission needs to be made and all the changes that need to happen are taken care of by the law, without more formal agreements or filings being needed.

Nonstatutory Conversion

As a business owner, if you opt for this method of converting your C-Corp to an LLC, you might find it slightly complex because the process here isn’t one-off but requires a step-by-step procedure.

Most business owners who opt for it do so because statutory conversion isn’t applicable in the state where they are incorporated. Read this post to discover some information about differences in the state of incorporation.  

The first step in this type of conversion is the incorporation of the new LLC. Once this has been done, a formal application is then made requesting the transfer of the assets and liabilities of your C-Corp to the LLC.

Unlike in a statutory conversion where this transfer means an automatic conversion of shareholders' stakes to LLC membership rights, a separate agreement has to be made for that transfer. Once this is done, the conversion is completed.

In states where this method is most common, there is a variation of the process offered to business owners where all they are required to do is register their new LLC, then proceed to liquidate and dissolve their C-corp.

This dissolution process involves filing a number of documents to the Secretary of State’s office which when approved means the conversion has taken effect.

Statutory Merger

A statutory merger shares some features of a statutory conversion and some features of a statutory conversion. Just like the statutory conversion, a statutory merger varies slightly in implementation proceedings per state, but the core steps of this method of conversion are the same.

First, you and other owners at your C-Corp are required to register the LLC which will be ‘merging’ with the C-Corp.

By doing this, the shareholders at your C-Corp become members of your new LLC. Once this has been carried out, you and these current shareholders at the C-Corp proceed to vote to merge your roles as stakeholders in the C-Corp with your LLC membership.

After this is done, the next step is a formal exchange of C-Corp shares by each former C-Corp shareholder for LLC membership rights.

This exchange process signifies the merging of both companies and after it is done, a certificate of merger is sent to the Secretary of State’s office along with any other document that they might request such as a formal dissolution of the C-Corp.

Unlike in a nonstatutory conversion, once this process is carried out, there is also an automatic transfer of assets and liabilities from the C-Corp to the LLC.

Now, while all three methods listed above will save you and your shareholders from the double taxation of corporations, the business structure change can come with certain tax implications that will require the expertise of a tax advisor to sort. This is why entrepreneurs are always advised to do proper research, starting from understanding the state laws regarding business structure conversions, then examining their C-Corps to see parts of it that might result in tax issues when converted to an LLC. Some of these implications might come as a result of retained earnings or even appreciation of assets.

Finally, it is important, maybe even crucial to determine from the beginning how your new LLC will be taxed given that LLCs can be taxed in three different ways. You can discover some tax consequences related to this type of conversion here.

Looking to incorporate your LLC to kickstart this process? There is no better partner than Firstbase to help you do just that.

Firstbase is backed by Y Combinator, Carta Ventures, CEO of TransferWise, and many others.

We have also helped 10000+ entrepreneurs like you launch their businesses in the U.S.

It takes less than 5 minutes to fill out the application form.

Click here to get started.

Get started with Firstbase.

Apply in minutes to join the greatest startup ecosystem in the world.