How to Convert a California LLC to a Corporation (2023)

 

Do you know what it takes to convert a California LLC to a corporation? If not, you have come to the right place!

This legal topic can be confusing to business owners who wish to make a switch but are not sure if it is the right solution for their business. 

Whether you are relying on your own funding resources or wish to obtain venture capital, learning more about this process may benefit your business. After you read the following content, book a call or speak to us here: https://mollaeilaw.com/start.

The sooner you do so, the sooner you can learn how our experience and knowledge can move your business plans forward.

 

How Does the IRS View It When You Convert a California LLC to a Corporation?

When you convert a California LLC to a corporation, you will find that the process is fairly straightforward, once you speak with an attorney.

California law, as do other state laws, instantly transfers an LLC’s assets and debts to the newly formed corporation. The California company is treated as a continuation of the former LLC.

 

An Assets-over-Transfer

This type of statutory conversion is called an assets-over-transfer by the IRS. That means that the LLC contributes its assets to the California corporation in return for stock.

It then liquidates the assets, allocating the shares of the new corporation to the LLC’s former members. 

This event, in and of itself, is not taxable, provided the former members of the LLC own the corporation. This means that the prior LLC members must own shares in the corporation that represent at least 80% of the voting power of all shares.

 

Why It is Easier to Convert a California LLC to a Corporation than It is to Convert a California Corporation to an LLC?

When you convert a California LLC to a corporation, you also have to look at the flip side of the transaction. If you convert a corporation to an LLC, things automatically become more complex, especially with respect to taxes.

When a California corporation converts to an LLC, the event is treated, tax-wise, as though the company liquidated its assets. Distribution is made of the net proceeds as a taxable dividend. This dividend is distributed among the shareholders. 

Under this type of conversion, each phase of the process sparks double taxation, a characteristic attributed to the corporate framework.

Under IRS rules, the corporation pays a tax on the sale of assets while the company shareholders pay tax on the shareholder distributions.

 

How to Convert a California LLC to a Corporation S Status for Tax Purposes

Instead of asking an attorney how to convert a California LLC to a corporation, you might elect to change the LLC’s tax status instead. Your attorney may advise that you do this if you want to change your LLC status for tax reasons only. 

Although an LLC is treated as a pass-through entity by the IRS, an LLC can also be set up to be treated as an S corporation when paying tax. This permits it to enjoy the limited ability of an LLC without having to pay any self-employment tax.

Also, if you remain an LLC and simply elect to change your tax status to that of an S corporation, you don’t have to go through the formalities that are associated with maintaining a corporate entity. These formalities include filing articles of incorporation, recording meeting minutes, naming a director and board of directors, and paying shareholder dividends. 

Naturally, changing your tax classification is far easier than converting a California LLC to a corporation, so you need to review the pros and cons of each activity. If you maintain your LLC and elect for subchapter S corporation status, you will be regarded, tax-wise, as an S corporation. 

You will still enjoy the pass-through taxation of an LLC but will avoid the double taxation of a traditional corporation. In this case, your LLC is treated the same as a partnership or sole proprietorship. 

When you set up yourself in this manner, you can receive wages and salaries, along with the other owners of the LLC. These earnings will be subject to IRS withholding, such as FICA. However, the remaining net income can be treated as passive dividend income – income that is not subject to self-employment tax or SECA (Self-employment Contributions Act) tax. 

If you elect to be treated differently with respect to taxation, you can make a change that much easier. However, that does not mean you still won’t need legal guidance and help. To learn more about changing your tax election, book or call to speak to us here: https://mollaeilaw.com/start. 

Also, an important note to remember – While an LLC can always be treated as a corporation for tax purposes, a corporation cannot enjoy pass-through benefits ever. If you do choose to preserve your LLC, you have more flexibility when it comes to planning your taxes.

 

What Steps Do I Need to Take If I Decide to Convert a California LLC to a Corporation?

If you still want to know how to convert a California LLC to a corporation, you need to take certain steps to make it happen.

Knowing these steps can give you a better idea of what to expect if you wish to proceed with the conversion. In this case, we will review the steps needed to make a statutory conversion in California.

Review California State Law

Go over the California state law with your attorney to determine what steps are needed. This is where it can get confusing. For instance, the precise steps may vary, depending on state law. For example, if you want to convert a California LLC to a Delaware corporation, you need to review the laws of both states.

Review your LLC’s Operating Rules

Review your LLC’s operating agreement to make sure no restrictions are in place, or that you need special approval to convert the LLC.

Check on the Name for the Corporation if You Plan to Change the Name

If you will be using a different name as a corporation, the name should be checked to ensure its availability. If the new corporation name is similar to another corporation name, you cannot make the conversion However, the Secretary of State’s office will not reject the name if it conflicts with the name of your LLC, or the entity that is being converted.

Determine the Franchise Fee and Pay It

You are subject to paying a franchise fee in California if you convert your California LLC to a California corporation. This holds true for other states as well. You can get further details when you book a call or speak to us here: https://mollaeilaw.com/start.

Prepare a Certificate of Formation for Your New Corporation

If you convert a California LLC to a California corporation, you can only do so after you submit the Articles of Incorporation to the Secretary of State’s office along with the filing fee. Articles of Incorporation are different, depending on the type of corporation you establish. 

Create a Plan of Conversion

This document should include the name of the LLC that is being converted, the place of the formation, and the name of the corporation.

Include a statement that the LLC will continue to exist in its new form, or as a corporation. Attach the certificate of formation to the plan for approval. 

 

Prepare and File the Certificate of Conversion with the Secretary of State

If the conversion takes place in California, you should fill out form CONV-1A. Add the name of the converted entity and its jurisdiction along with the other requested information on the form.

 

What To Do Next

Now that you have a basic knowledge of how to convert a California LLC to a corporation, you can go over the plans with an experienced attorney. Book a call to speak to us here: https://mollaeilaw.com/start. 

Whether you want to change the tax status of your LLC or change it over to a corporation, we can provide you with total assistance. By using our services, you can make business changes that will benefit you, your customers, and employees. Give us a call now for all the details.