When planning a business, many entrepreneurs choose between forming an LLC or a corporation, as both of these business structures are very popular. This is one of the most crucial decisions in the fate of your future business. It will determine its tax status, management structure, ongoing requirements, and more.
If you want to change a corporation into a limited liability company during your business operation, you should do it properly.
In this article, we will discuss the features of an LLC and a corporation, as well as their strengths and weaknesses. Furthermore, we will cover the process of converting a corporation into an LLC and the online companies, which can help with this.
A corporation is a formal business entity based on shared ownership and separation of management responsibilities from the owners. It is the only type of business entity that can issue the stock for the company’s shares distribution.
The main advantages of a corporation include the following:
Few aspiring entrepreneurs decide to start a corporation instead of an LLC or Sole Proprietor because this type of enterprise is more formalized. A corporation has more structural requirements. Besides, it requires more paperwork and regular meetings for directors and shareholders.
A limited liability company (LLC) is a formal business structure created by one or more participants to generate income on a systematic basis.
An LLC is considered to be a hybrid legal structure because it has features of other types of businesses.
The similarity with sole proprietorships and general partnerships is explained by the fact that the IRS treats LLCs as “pass-through” tax units. The company does not pay federal taxes, leaving that responsibility to the owners who report business income and expenses on personal 1040 tax returns and/or Schedule C. However, the owners have the right to change their tax treatment to corporate by filing a request with the IRS.
On the other hand, the principle of limited liability of the owners is similar to that of an LLC. This is one of the main reasons for launching an LLC, because, in the case of a legal dispute, creditors cannot claim the owners’ personal assets, for example, a house, savings, a car, etc. At the same time, we should remember that such protection is valid only if personal property is separated from the LLC’s assets.
In comparison to corporations, however, LLC formation is cheaper and requires fewer documents. Additionally, this business structure offers tax and structural flexibility, hence LLCs are more popular.
The need to convert a corporation to an LLC may arise for a variety of reasons. The most common ones are the following:
Regardless of the reasons that motivated you to make this decision, there are several ways to convert:
Let’s take a closer look at them.
The easiest, fastest, and relatively new option. Therefore, the statutory conversion is currently used only in 35 states. Depending on the specifics of the law, the process may involve different steps, but the most common are as follows:
A more complicated method, which is usually used when the corporation is located in a state where Statutory Conversion is not allowed.
To perform a Statutory Merger, you should follow these sequential steps:
The Nonstatutory Conversion method is more complicated than the previous ones. It does not involve an automatic transfer of ownership and assets from the corporation to the LLC, so it is rarely used today.
As with a Statutory Merger, the process begins with launching a new LLC and includes a transfer of ownership, a transfer of assets, and dissolution of the corporation. However, unlike the options listed above, each step of the Nonstatutory Conversion has to be accompanied by a separate exchange agreement. Given that, you will probably need to hire a business attorney who understands state law if you decide to use this method.
Converting a C-corporation to a limited liability company allows the owners to enjoy LLC benefits, like:
Nevertheless, in most cases of conversion, there can be significant tax expenses. This is primarily due to double taxation, which means that tax is paid first by the owners (when distributing the funds) and then, by the corporation (when selling the assets). An exception can be made for corporations that meet the following criteria:
Usually, in a conversion of a corporation, the tax expense is reduced if the LLC for taxes will be treated as a corporation rather than a partnership. The IRS has two options for handling such a conversion:
Pay attention to the fact that the type of conversion does not affect the LLC tax forms to be filed in the future.
As for the conversion of an S-corporation, this process has some differences compared to a C-corporation. S-corporations do not pay federal taxes on their own behalf leaving that responsibility to the shareholders, which limits the impact of the conversion.
There are a number of tax implications associated with a conversion, so you should be careful when making your decision. Consult with an experienced attorney or accountant who can answer questions about the specifics of an LLC and taxes in your state.
As a business owner, you probably have a lot on your plate. If you don’t want to waste your time and energy to convert your corporation into an LLC, you can entrust it to professionals.
An experienced attorney can take control of the conversion process, but these services are expensive. Depending on their experience and location, the prices can reach up to several thousand dollars. Taking into account that converting a business also comes with certain expenses, most entrepreneurs prefer to hire a professional online company. As a rule, the cost of their services is affordable even for small businesses, and the quality of the support is quite high.
There are many companies involved in opening an LLC or a corporation, but business conversion services are provided by only a few of them. We have prepared below a list of three online services that are at the top of the business creation and support industry:
If you intend to change your business structure, you need to comply with the law throughout the entire LLC conversion process. Therefore, when planning to convert your corporation into a compliant LLC, you have to carefully study the specifics of the state where you operate. Find out whether statutory conversion or statutory merger is allowed and take care of all the necessary paperwork in advance. Careful preparation and following the rules will not only make the conversion process comfortable but will also help avoid potential legal complications in the future.
If you want to take some responsibilities off your hands, then you can let one of the professional online companies handle the conversion of a corporation into an LLC. BizFilings, Swyft Filings, or LegalZoom, which we covered above, would be great options. Compared to an attorney, any one of them will save you hundreds of dollars, as well as your time. You’ll get a ready-made business without the paperwork and searching for the necessary forms on your own.