Starting your business on the right foot means setting up a proper legal structure that will both meet your current business needs and have enough leeway for future growth and development. Today, most entrepreneurs choose to form an LLC to legalize their business. A limited liability company status has a lot going for it in the modern business environment. However, at some point, many businessmen might face the issue of changing their company structure to adapt to some new circumstances or simply catch up with the fast business growth. If you also think about the conversion of an LLC to a corporation, you’ve come to the right place. Not only will we show you the difference between LLC and corporation but we will also overview all the stages of the conversion procedure and give you some ideas on how to complete this process with minimum time and effort spent from your side.
Before digging into conversion, think twice and take yet another look at an LLC and corporation, the advantages that they offer, and the business scenarios they best work for. Involving into the business structure conversion, you need to be 100% sure your business will benefit from this.
An LLC or a limited liability company is a sort of proprietorship, partnership, and corporation hybrid created to match present-day business settings. It smartly combines the limited liability of the corporation with lower taxation of partnerships. In fact, these are the major LLC advantages. Separating the owner assets from legal and financial liabilities of the company, LLC business is taxed as a pass-through entity, which means that company profits are reported on personal tax returns of its owners, thus eliminating the so-called double taxation we will talk about later.
When it comes to organizational structure, LLCs can be single- or multiple-owners companies, and a fairly easy formation process is yet another point in favor of this business structure. A breeze to register, LLCs are also no brainers to run. There are only a few state requirements to follow and reports to send to maintain the company’s good standing. As such, an LLC is undoubtedly a great starting point for smaller businesses, family-owned lower-scale companies, and entities with several fixed owners.
A corporation definition revolves around the corporate property. Unlike LLCs, corporations are usually established by a group of people who share similar business objectives. Creating a legal entity, they make contributions to the company equity that define their ownership. Corporations issue stock normally distributed among the company owners or shareholders pro-rata to their equity shares. Creating a corporation is quite a simple task, especially if you delegate it to a lawyer or an online formation service of your choice. You just need to choose the right type for taxation purposes. While Non-profit corporations are not taxed at all, C-Corps are taxed at both individual and corporate levels, exposing you to double taxation. In the meantime, S-Corporations pass their profits and losses to the owners’ personal tax returns thus avoiding corporate taxes.
Similar to LLCs, corporations hold their owners free from the company liabilities, thus protecting their personal assets. Yet, the biggest plus about corporations is that they allow easily raising funds for working capital injections. They can attract investors by selling the company shares. This way, it is easy to promote and maintain the company’s growth. LLCs don’t offer such opportunities. By and large, corporations are an optimal choice to large-scale companies and those with foreign investments. Besides, corporation laws do not vary by state (while LLC laws are state-specific), so you always know what you are involved in.
On the negative side, though, entangling many bylaws and bound by more compliance requirements, corporations are more exposed to bureaucracy and operating routines. The company management needs closer attention and day-to-day operation engages a lot of paperwork.
From the start, the good news is that it’s possible to change the business structure if you decide that you need it at some point. Speaking of which, most often, conversion is initiated by potential investors who make it a condition for their investments. Anyway, we are here rather to discuss the technical and legal side of the whole process. Overall, there are several routes or methods you can follow to realize the change, each type of conversion having its pluses and minuses.
Whatever route you take, you can’t ignore other common incorporation steps such as drafting the company bylaws, holding meetings to appoint the company directors, formalizing the stock issue and distribution, and so on.
LLCs and corporations vary in taxation, at least to the extent of certain aspects and especially when it comes to C-crops. As far as conversion from an LLC to a corporation is concerned, there is not much to worry about since there will be no tricky tax issues attached. In case you transfer most of the LLC assets to a new corporate entity in exchange for shares further distributed between the former LLC members, such a transaction is treated by tax authorities as non-taxable. Most of the assets here should refer to no less than 80% of voting shares in a newly formed corporation. It will mean that LLC owners will have full control over the company. However, if the LLC ownership is not switched to the corporation membership, there might arise some added taxes. So, a consultation with a reliable and experienced tax expert will never go amiss.
Besides, if you simply want to make use of corporate taxation, you don’t have to form a new corporation. It’s enough to change your LLC’s tax status with the IRS. Operating as an LLC, your company can be taxed as an S-Corp or C-corp. Though not entitled to issue stock, it can safely save on some LLC-specific taxes.
Many legal issues and formal processes often turn out to be more complicated than they seem as soon as you get involved. So, to give your LLC conversion a smooth start and have it completed in a maximum hassle-free manner, you might want to delegate this task to professionals. To do that, you can hire an attorney, yet it’s quite an expensive option. An alternative choice is to let a special online service do it. Run by experienced experts, these services will do pretty much the same job at a more affordable cost. Among a variety of formation services available in the modern legal market, there are a few companies that not only assist in launching an LLC or corporation but also provide business conversion services. And our best recommendations here are as follows:
Though converting your LLC to a corporation is not the easiest process, it is possible, and you can do it. Yet, it’s strongly advisable to get a reliable legal assistant onboard that will guide you through all conversion stages and make sure the whole process is completed lawfully and beneficially for you. Be it a lawyer or an online service, you definitely need a legal helping hand.
Taking a look at LLCs vs Corporations, there are a lot of advantages going for each business structure. So, before converting to a corporation and getting involved in related formalities, make sure you really need it. The most common reasons for LLC conversion include fundraising, joining startup accelerators, engaging foreign investments, and the ability to issue shares. If the only reason is tax optimization, you’d better consider simply changing your LLC tax status.