Should You Convert Your LLC to a Corporation?

If your business goals are incompatible with the structure of an LLC, it might be time to consider converting into a corporation—but it's important to first weigh the implications of this new business structure on your operations and tax liability.

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should you convert your llc to a corporation

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Updated on: March 21, 2024
Read time: 3 min

Since creating a limited liability company (LLC) is an easy process in most states, many business owners opt for this structure when establishing their company. But sometimes, a company's goals outgrow the LLC structure, and the owners want to convert their LLC into a corporation.

Conversion requires more paperwork and has tax repercussions and additional filing requirements. Here is some guidance to help you evaluate whether conversion into a corporation is the best move for your LLC.

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Why convert an LLC into a corporation?

You might want to convert your LLC into a corporation for practical reasons.

“If your company is exhibiting significant growth, converting from an LLC to a corporation will give you the flexibility to allocate some profits to qualify for a lower income-tax bracket," says Paul Sundin, a CPA and tax strategist for Emparion.

If you plan to offer stock options to employees, this benefit is available only through a corporation. In addition, “incorporating has a positive effect on a company's legal liability," Sundin says. “As an LLC, getting sued would mean risking your personal assets if you lose a case. A corporation, however, is only liable for the assets owned by the company."

Advantages of converting

According to Dan Nguyen, a California business attorney, here are some additional benefits of converting an LLC into a corporation.

  • In a corporation, shares of corporate stock are freely transferable by sale, gift, or pledge. In addition, the “transfer of stock does not affect the separate legal status of a corporation," Nguyen says.
  • It is easier to raise capital and implement employee incentive plans, and corporations can deduct some health insurance and fringe benefits.
  • The management structure is well-established in a corporation.
  • In certain states, like California, some tax benefits are available to corporations that aren't available to LLCs.

Disadvantages of converting

One of the biggest disadvantages of conversion is that a “corporation is subject to double taxation—with both the company and its shareholders paying taxes on profits," Sundin says. However, if your business qualifies as an S corporation, profits pass through to shareholders' personal tax returns, and the corporation avoids double taxation.

Keep in mind that the cost of certain maintenance items increases in a corporate structure, such as the necessity of recording minutes of meetings as well as additional tax-filing requirements. The management structure in a corporation is less flexible. An LLC is simpler to operate.

What's the right decision?

It depends. As an LLC owner, you need to evaluate the company's profits, how fast it is growing, and whether the current structure provides the protections you need, such as greater liability protection and tax savings. Contact an accountant or attorney to determine the best course of action.

How do you convert an LLC into a corporation?

In general, three types of conversions are possible, depending on your state.

Statutory conversion

Many states already have statutes in place that make a quick-status conversion simple and straightforward. You fill out some forms with your company name, Employer Identification Number, address, and the registered agent's information and submit these to the secretary of state.

Statutory merger

Through this process, you merge your existing LLC into a new corporation. Here are the steps:

  1. Create a new corporation.
  2. Take a vote among the LLC members approving the change from members to stockholders.
  3. Change membership rights to agreed shares in the corporation.
  4. File a certificate of merger and other required documents with the secretary of state.

Nonstatutory conversion

This is the most expensive and difficult process of changing entities since it includes asset liquidation and dissolution of the existing company to create a new one. The new corporation absorbs all assets and liabilities.

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This article is for informational purposes. This content is not legal advice, it is the expression of the author and has not been evaluated by LegalZoom for accuracy or changes in the law.

70 days ago
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So Helpful…

Legal Zoom is quick and easy to create a New Corporation. The price is fair. Thank you for all your assistance.

customer Kim
133 days ago
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I’m new to all this basically my first…

I’m new to all this basically my first time filing for a corporation on my own and I didn’t last in 30 minutes. This is great thank you it just walks you through everything you need with answering questions. Did you already know

Brenda Reynoso
149 days ago
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Leogilyn Pavo was so helpful

Leogilyn Pavo was so helpful. I needed to change my business address and Leogilyn walked me through the process step by step. Leogilyn even looked up specific answers about my corporation so I could fill out the required forms correctly. I couldn’t have done this without Leogilyn’s help!

Kate Lively
246 days ago
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Genaro was great!

Genaro was a great listener, remembered everything we spoke about and then walked me through the process of moving my LLC into a Corporation. Glad I called rather than try to do online - we got it all done in about 20 minutes.

Folger Emerson
255 days ago
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Spoke clearly, was professional and very knowledgeable about his business

Edgar was so pleasant and professional and I will be sending more people to him for their corporation needs as well!! He is so knowledgeable about the sales products he sells. This was a flawless and simple process bc of him!

Cheryl-Lyn LaRocca
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