Changing an LLC into a C-Corp

Posted on Friday, August 22, 2008 at 8:08AM by

Jeff |

7 Comments

And finally, we have Matt's last question. While this may seem like a bit of a detail question as a followup to my post about choosing a business structure, it's a good question to ask. If you have a similar followup question, please ask away, because that's the easiest way for me to get the information posted online for others to see in the future. Chances are, if you have the question, so do others.

Matt writes:

Also, how hard is it to turn a large or growing LLC into a C-Corp? I really appreciated your discussion of the upsides and downsides of both, but felt this was the one question I still had left unanswered.

It's not hard at all. You will have some legal expense, as the usual way to do this is to create the new entity, do a merger, surrender control, and a variety of other legal-ish things. However, this is all on paper, and your attorney should be very familiar with the process, or that's an indication that it's time for a new attorney.

In general, if I'm starting a new company, don't have any outside investors, don't have a stock option plan, and just need an entity through which to track expenses and ownership among the founders, and LLC is a cheap, easy way to go. When it comes time to bring in outside investors, it's time to go to a C-Corp right then and there, because converting to a C after involving other people in your LLC ownership is going to get more complicated and messy (and expensive). Save yourself the headache and go with a C-corp before you take on outside investment.

It's actually easier to convert an S-corp to a C-corp, but in my opinion there is little compelling about going with an S-corp over an LLC. It's just a check box at tax time, and viola, you're a C-corp. But, keep in mind that if you are converting to a C, you have some good reasons which are very likely to involve accountants and lawyers and the like anyway, so having them do the little bit of extra work to move from LLC to C is really a drop in the overall bucket.

There are a handful of advantages (and disadvantages) of going S-corp over LLC to start. But, in my opinion, you are going to want to go C-corp the instant you want investors, stock options, warrants, or the like. So, start with a nice cheap LLC, and as soon as you need something fancy, make the switch.

Also, do yourself a favor and set the LLC up as a Delaware entity (assuming you are in the USA of course). You're going to want to have your C-corp be a Delaware C, and so this will make things a little easier as you're only dealing (mostly) with a single state's securities office (usually the secretary of state).

Google it and you'll find lots of information and opinions, but what I try to do on this site is give you the specifics of what I'd do in a similar situation and that is this: Start with a Delaware LLC, and be prepared to convert to a Delaware C-Corp the minute the ownership gets more complicated.

As always, if there are followup questions, fire away.

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