When you’re first forming your business, one or the other might seem like the right fit, but as your business grows and matures, you may realize that the other entity type would better suit your company.
This raises an important question. If you initially choose the LLC entity type, can you convert that LLC into a corporation down the line? And if so, what does this process look like?
In this guide, we’ll tell you everything you need to know about converting an LLC into a corporation.
Quick Note: If you’d rather simply dissolve your LLC and form a new corporation, there are plenty of online incorporation services (like LegalZoom and ZenBusiness) that can take care of the paperwork for you.
What Is an LLC?
First off, let’s quickly outline what an LLC is. A limited liability company mixes elements of sole proprietorships, general partnerships, and corporations, essentially giving entrepreneurs the best of these worlds.
LLCs are typically taxed similarly to sole proprietorships and general partnerships, in that the owners include any company profits or losses into their personal returns — the LLC itself does not owe income taxes. An LLC may also elect to be taxed like a corporation, although this is not a very common option.
There are similarities to corporations too, especially when it comes to financial responsibilities. In an LLC, the owners or members are not usually personally accountable for the financial status of the business. This means that if someone sues your LLC, your personal assets are not at risk.
In short, LLCs are so popular because they provide a variety of legal protections for your business, while also enhancing your company’s credibility.
What Is a Corporation?
A corporation is another type of formal business entity, with the crucial distinction that it is the only entity type in America that is allowed to issue stock. The corporation’s stockholders own a portion of the company’s net worth, essentially making those stockholders the owners of the corporation.
Unlike an LLC, corporations aren’t as flexible when it comes to taxation, and they also have much more rigid managerial structures that owners must adhere to. Furthermore, corporations are required to keep extensive records, hold regular meetings for both its directors and its shareholders, and take detailed notes from each of these meetings. An LLC has none of these responsibilities.
In addition to the ability to issue stock, corporations have some other advantages over the LLC as well. One of these advantages is the corporation’s ability to attract investments in the form of venture capital. Venture capitalists hardly ever invest in pass-through entities of any kind, so if you’re seeking VC investments, the corporation is a vastly superior entity type compared to the LLC.
The other advantages of a corporation center around the fact that it is far more established in the courts. The corporation as an entity has been around for centuries, and therefore court systems have had plenty of time to establish precedent regarding how they’ll be treated.
In addition, the corporation has the same structure in every state, whereas all 50 states have their own version of the LLC. These are advantages because, when it comes to court cases, certainty is always preferred over uncertainty — if there’s no consistent, established rules, it’s harder to abide by them in a compliant manner.
How Can I Convert an LLC Into a Corporation?
First and foremost, yes, you can convert an LLC into a corporation. As for how you can do this, there are two main options. The simpler option is to perform a statutory conversion, which is a fairly recent development in the American business landscape, and is still only allowed in 35 states.
The process for a statutory conversion varies a bit from state to state, but in general, it involves the preparation of a conversion plan, which all members of the LLC need to approve in a vote. Then, you’ll need to draft a certificate of conversion, which may have a different name in your state, such as the articles of conversion. You will also need to create the articles of incorporation (or similar document), which is the standard formation document for a corporation.
Once you’ve done all of these steps, you can complete the statutory conversion process by submitting the certificate of conversion and the articles of incorporation — along with any relevant fees — to your state’s Secretary of State office. One other important note is that if your LLC was authorized to conduct business in additional states, you will also need to look into the process for converting your entity type in those states.
The second option is the statutory merger. The only real reason you would use this option instead of a statutory conversion is if your state doesn’t recognize the statutory conversion, because the statutory merger is a far more complex process. Again, the process isn’t exactly the same in every state, but the first step is to form an entirely new corporation.
Then, your LLC’s owners must approve this merger through a vote, in which they will cast votes as both an LLC member and a corporate stockholder. The next step is for your owners to trade in their LLC membership rights for equivalent shares in your new corporation. Finally, you will need to draft and submit a form usually called a certificate of merger with the Secretary of State. Once all of these steps are completed, you will need to dissolve your LLC to end your company’s existence as an LLC.
The reason this is the less-preferable option compared to a statutory conversion is primarily because it’s much more of a hassle to create an entirely new business entity and merge it with your LLC than it is to simply convert an existing business. Furthermore, statutory mergers are more expensive, for this same exact reason.
There is another way to convert an LLC into a corporation, but it’s rarely used these days. Due to this, we won’t get too in-depth on the process, but we will briefly explain it. A nonstatutory conversion, like a statutory merger, requires the formation of a brand-new corporation.
You will also need to transfer the assets of your LLC to the new corporation once it’s formed, convert your LLC members to corporate shareholders, and dissolve your LLC. While these are all steps that are also involved in a statutory merger, the big difference is that in a statutory merger, these transfers are relatively seamless and automatic.
In a nonstatutory conversion, you’ll need to draft agreement documents to complete each exchange of power and transfer of assets. This can be a tremendous hassle, and it’s a complicated enough process that we would never recommend the DIY route — you would almost certainly need to hire a lawyer to assist you.
To wrap up this section, we’ll also mention that with any of these options, you will need to complete the rest of the steps that come with any typical incorporation process. This means creating a corporate bylaws document, selecting directors and officers, holding initial meetings, distributing stock certificates, etc.
Can I Hire a Service to Convert My LLC Into a Corporation for Me?
If this process sounds like more of a hassle than you’re willing to take on, or if you would rather have the peace of mind that each step was completed correctly by a professional, you do have some options. You could hire a business attorney to convert your LLC into a corporation, although this is an extremely expensive route that could see your expenses climb into the thousands of dollars.
Another option is to hire a business services company. While there aren’t nearly as many options as there are for forming an LLC or corporation, there are still several reputable companies offering business conversion service. Take a look at a few of our favorite options:
- Swyft Filings ($199): Swyft Filings has a great price point for this service, and they’ll complete every step of the process on your behalf. When they’re finished, they’ll upload all of the relevant documents to your convenient online dashboard. It’s also worth noting that Swyft Filings receives spectacular customer feedback.
- LegalZoom ($229): LegalZoom is perhaps the best-known company in the business services industry, and while their pricing is a bit higher than Swyft Filings, they’re still a strong option. LegalZoom covers this service with a 100% satisfaction guarantee that ensures you’ll receive a full refund if you’re unhappy with their service for any reason.
- BizFilings (price varies by state): Another solid choice for this service is BizFilings. While their pricing does vary depending on which state you’re converting a business in, you can always count on them to provide strong services at reasonable rates.
While it’s not always the simplest process in the world, it is certainly possible to convert your LLC into a corporation. Depending on which state your business operates in, you will either use the statutory conversion or the statutory merger to complete this process.
If you would rather hire someone to take care of the entire process on your behalf, you can hire Swyft Filings, LegalZoom, or BizFilings. These are all reputable companies that we wouldn’t hesitate to recommend, and you can trust them to convert your LLC into a compliant corporation with minimal hassle for you.
We hope this article helped you enhance your understanding of how the LLC-to-corporation conversion process works!