Turning your LLC into a C Corp

How to change up your legal entity (and when it makes sense)

Hey founders et al. 

First off, welcome back! I hope everyone survived April Fools Day and recovered from that weird night at the Oscars. I haven’t.

In past episodes we’ve talked extensively about how C Corps are the preferred entity for startups that intend to raise money from the venture world. But what if you already started as an LLC? In today’s edition, we talk about what you will need to do if you found yourself in an LLC and all you want to be is a C Corp.

Four common ways to change to a C Corp

There are four common ways to take that LLC and turn it into a corporation:

1. Statutory conversion to a corporation. Most states allow LLCs to be converted to a corporation by the simple filing of documents with the state. At the time of the conversion, the LLC by operation of law becomes a corporation and, therefore, the owner of all the assets, liabilities, and obligations of the LLC.

   • When you would use this option: if you truly wanted a 1:1 conversion — i.e. you made an oopsies and you need to be a C-corp and not an LLC.

2. Form a new corporation and then merge the LLC with and into the new corporation. Here, the separate legal existence of the LLC will terminate on the merger, and by operation of law the new corporation will succeed to all of the rights and obligations of the LLC.

   • When you would use this option: Let’s say you also want to change ownership, bring on new founders, or bring on a new business at the same time. Forming a new corporation first might be the easier way to create the corporate structure you desire. You can then merge the LLC into that corporation with a little bit more certainty as to how the corporation will be structured prior to the merger.

3. Form a new corporation and then have all of the LLC's assets contributed to the new corporation in exchange for the stock in the new corporation. Following the contribution the LLC can be liquidated and dissolved and its only asset, which would be the stock of the corporation, distributed to the members of the LLC.

   • When you would use this option: Similar to 2, perhaps you wanted to structure the corporation and then have that corporation “purchase” the LLC with equity. Basically, with this method, the corporation can put a price on the LLC and then distribute that amount of equity to the members of the LLC. It may be cleanest to do this when the corporation is combining assets from many different LLCs.

4. Form a new corporation and then have the LLC's members assign their LLC interests to the new corporation. LLC members can be given equity in the new corporation. The LLC will be a wholly owned subsidiary of the new corporation following the assignment of the LLC interests. There is some flexibility with this structure because future operations can either continue under the LLC or the LLC can be liquidated with all of its assets and liabilities being assumed by the corporation.

   • When you would use this option: When you would want to continue to operate the business (either in whole or in part) through the subsidiary LLC. This can be a good option if the LLC has contracts that are not easy to assign to the new corporation, or if the founders would prefer not to set up new bank accounts, business licenses, etc. This also may be a good idea if the corporation intends to operate as a layer on top of several different businesses (for example, you started a standalone gym under an LLC, but now want to obtain financing to scale your business to many gyms across the country).

I imagine there could be many more uncommon ways to fry the fish (…”skinning cats” is officially cancelled…) but I’ll leave the real creative solutions to the lawyer you’ll likely need to hire to get this done. These different approaches can have differing tax and legal consequences. Again, you should consult your company's tax and legal advisors prior to choosing the right one.

What else needs to be done?

In addition to the state legal filings and entity-level actions required to complete the conversion, there are other third-party actions that must be taken into consideration in preparation for and in connection with the conversion, including:

• Obtaining the approval of the members of the LLC.

• Reviewing agreements including loans, leases, and supplier and vendor agreements to see if the conversion requires any third-party approvals or notifications.

• Reviewing licenses and permits to ensure they reflect the new entity.

• Contacting your bank to notify them of the corporation's new employer identification number (EIN) if the corporation does not, or is not able to, use the LLC’s EIN, and change of name (from Acme LLC to Acme Inc.). You may need to create new bank accounts in either case.

• Vendors who pay the company and issue the company a 1099 will need to issue the 1099 to the corporation and list the corporation's name and EIN.

• Changing labels, business cards, purchase order forms, contracts, policies, and so on that reference the LLC to reference the corporation.

Tools and Resources

There are some excellent startup legal resources out there that founders may not know about, including a list of corporate formation services and educational resources that help you navigate topics like this. We are always adding to this database. See the full list of resources here. 

I was recently looking into options for hiring remote workers and came across Middesk Agent. I thought they had a really video explaining the pain around hiring across state and international lines, so I felt like sharing the goods. Note: I do not use them, nor do I benefit from sharing this.

Have any resources you'd recommend to other founders? Please fill out this form.

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Thanks for reading. Stay lawyerly.

Brian