For businesses looking to expand and attract investors, converting from an LLC to a corporation may be a smart move. While the process may seem daunting, there are specific steps that must be taken to make the transformation seamless and official. In short, following the appropriate guidelines and regulations can help ensure a smooth transition.
In this article, we’ll go over the crucial steps you need to take when it comes to changing from an LLC to a corporation.
Step 1: Research the Pros and Cons of Changing from an LLC to a Corporation
Changing a business entity from a Limited Liability Company (LLC) to a corporation can result in a modified business structure and tax return. An LLC is considered a pass-through entity for income tax purposes, while a corporation is not. Therefore, LLC owners may want to convert to a corporation to take advantage of lower corporate tax rates.
One of the key benefits of converting from an LLC to a corporation is the ability to raise capital. Corporations can issue stock, which can be sold to investors, whereas LLCs have limitations on the ability to raise money in this way. By becoming a corporation, the potential pool of investors and the amount of available capital can increase, allowing the business to scale and grow more quickly.
Another benefit of a corporate structure is greater legal protection for the owners. A corporation is its own entity, so if the company faces legal issues, the owner’s personal assets are generally protected. LLCs, on the other hand, are often considered pass-through entities, and owners may be held liable for any legal issues.
However, there are also some drawbacks to consider when changing from an LLC to a corporation. One of the main concerns is increased complexity and costs. A corporation has more regulations and requirements than an LLC, and there may be additional legal and accounting fees associated with the conversion process. Additionally, corporations are subject to more stringent taxation requirements, which can potentially result in higher tax bills for business owners.
Step 2: Decide on a Corporate Structure
If you decide that changing from an LLC to a corporation is the right move for your business, you’ll want to determine the type of corporation that suits your business best. You can opt for either an S corporation or a C corporation. The primary difference between these two corporation types is in how income tax is handled. S-corps pass profits and income to the owner’s personal income tax returns, while C-corps file separate returns and pay taxes on their profits.
To take advantage of the pass-through entity’s tax benefits, a corporation can elect to be treated as an S-corp. However, for companies that are expanding, it might be beneficial to choose the C-corp structure, which allows for a greater number of shareholders.
Step 3: Prepare and File Conversion Documents
Once you have determined the type of corporation that suits you, it is essential to follow the appropriate filing requirements with the Secretary of State. As a registrant, you will need to file Articles of Incorporation, change your company’s management structure, and establish a board of directors if appropriate. Additionally, you should notify any relevant agencies of the changes, including the Internal Revenue Service (IRS), the state Department of Taxation, and any state agencies that administer licenses or permits.
In some cases, a new business structure may require a new business name. Furthermore, foreign corporations will need to register with the Secretary of State in the state where they plan to expand their business.
Instead of spending time and effort gathering information on all the required documents you’ll need, we recommend working with doola for a seamless transition from an LLC to a corporation. As a platform designed specifically for small business needs, doola makes the process of changing from an LLC to a corporation as seamless as can be. Learn more here.
Step 4: Obtain a New EIN
At this point, LLC owners should obtain an Employer Identification Number (EIN) from the IRS. The EIN is needed for the corporation’s tax-filing requirements and other crucial purposes. It’s essentially a social security number for your business and you may need to obtain a new number when changing over from an LLC to a corporation.
Step 5: Notify Creditors and Relevant Organizations
Switching From an LLC to a Corporation Made Easy
Converting from an LLC to a corporation can have significant advantages for your business. By making this switch, you’ll have access to new investment opportunities, increased tax benefits, and greater personal asset protection.
With doola, you can make this transition seamless and stress-free. You can rely on our comprehensive platform to access a number of small business tools. doola is the one-stop shop for a seamless conversion process launched entirely online. Take advantage of all the benefits of becoming a corporation and use doola to make your conversion process a breeze.
What is the difference between an LLC and an Inc?
An LLC, or a Limited Liability Company, is a type of business structure that offers personal asset protection and pass-through taxation for its owners. An Inc, or a corporation, is a separate legal entity that offers limited liability protection for its shareholders and has a unique tax structure.
Which is better for my business, an LLC or an Inc?
Choosing between an LLC and an Inc depends on your business’s unique needs and goals. If you are looking for flexibility in management and ownership structures, an LLC might be a better fit. However, if you want to attract investors and have a clear path for growth, an Inc might be more suitable for your business.
How do I form an LLC or an Inc?
Forming an LLC or an Inc involves filing certain documents with your state’s Secretary of State office, paying a filing fee, and complying with certain regulations. It is recommended to consult with a legal professional or a service provider to ensure compliance with all the requirements.
What are the tax implications of forming an LLC or an Inc?
LLCs are pass-through entities, meaning that the profits and losses of the business are reported on the owners’ personal tax returns. In contrast, corporations have their tax structure and file separate tax returns. Tax implications can be complex and depend on the business’s unique factors, therefore, it’s recommended to consult with a tax professional before making a decision.
How do I choose a name for my LLC or Inc?
Choosing a name for your business involves checking your state’s database to ensure availability and compliance with legal requirements. It’s also recommended to choose a unique and memorable name that aligns with your brand’s values and mission.