How to Change Corporation to LLC – Benefits, Differences, and More

How to Change Corporation to LLC

Corporations, no matter their size, have been converting to LLCs more and more recently. And if you are interested in doing so, it would be regarded as intelligent.
Hence, here we will discuss how to change corporation to LLC.

If you want to convert your corporation to an LLC, you need to find a legal advisor who can help you do so. Therefore, after you read the following information,

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Taking permission from the shareholders in a corporation is necessary. Then you will have to move to the formal processes – such as filing articles. But the most complex step of all is dissolving the corporation and creating an LLC with all the assets and capital.

As simple as it sounds, this is just the gist.

In the following sections, you will get more information on how you should go about it, what difference it makes, and the benefits and risks associated with it.

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Can You Switch from Corporation to LLC?

Yes, a corporation can be changed into a limited liability company (LLC).
Changing from a corporation to an LLC is done differently depending on where the business is registered. In most cases, this is what it will take –

1. Take Permission from Shareholders

Getting approval from shareholders: In some states, shareholders have to agree to convert the corporation to LLC.

2. File Articles of Conversion

The next step is to file conversion articles with the state’s government. This document makes it official that the entity wants to change its legal structure.

3. Dissolve the Corporation

After the articles of conversion are filed, the corporation must be dissolved if it was a “C” corporation.

4. Create an LLC

After the corporation is dissolved, a new LLC must be made, and the assets of the old corporation will be moved to the new LLC.
It’s important to remember that converting can be complicated and may require the help of a lawyer or accountant.

Also, switching from a corporation to an LLC may have tax consequences, so it’s important to talk to a tax professional before making the change.
But conversion of S corporation to LLC tax consequences may not be that severe – so you can proceed without many worries.

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What Happens When a Corporation Converts to an LLC?

Certain changes occur when you change from corporation to LLC IRS. Here, we will be discussing those changes and modifications –

Formal Requirements

Most of the time, an LLC has fewer formal requirements than a corporation, like holding annual meetings and keeping records.
Not only will that save costs and time, but that will also have more motive to focus on what is essential.

Management Structure

The way an LLC is run is usually more flexible than how a corporation is run.
The members have more say over how the business is run, and the way the business is run can be changed to fit the needs of the business – another reason to change INC to LLC.

Tax Structure

Another benefit of changing to an LLC is the ability to choose the tax structure that works best for the business. They can be taxed as a partnership, a sole proprietorship, or a corporation.
This gives the members more options for determining how their business will be taxed.

Liability Protection

One of the best things about switching from a corporation to an LLC is that the business owners are less likely to be sued.
In an LLC, the member’s assets are usually safe from the debts and liabilities of the business, which acts as a benefit of the change from INC to LLC.

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How Do I Change My Business from Corporation to an LLC IRS?

When you change from corporation to LLC IRS, there are a few steps that you will have to take.
Even though the process might seem a bit complicated at first, you will be able to get through without much hassle.

  1. File Articles of Conversion
    The first step is to file articles of conversion with the state government. Different states might have different rules; hence, you should focus on the rules of your state.
    For instance, ask more questions such as: how to convert S Corp to LLC in California?
  2. Dissolve your Corporation
    After you file the articles of conversion, you need to dissolve your corporation, which is especially necessary if it is a C corp.
    Since the conversion of S Corp to LLC tax consequences are not that severe, the rules might be a bit more lenient.
  3. Form the LLC
    Now you need to form an LLC. In this part, you will also have to transfer the assets and capital from your former corporation to your LLC.
  4. Get a New EIN
    Since the structure of your business has changed, you will need a new employer identification number. It should be easy for you as a US citizen – otherwise, you must fill out an SS-4 form.
  5. File the Required Forms through IRS
    To change INC to LLC, you must file a few forms through the IRS. These include file forms 8832 and 1065/1040.
    Filling out these forms will be required for the taxes and income of your newly formed LLC.

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Why Convert from C Corp to LLC?

Converting from C Corp to LLC has its perks; while many restrictions come with a C Corp, the same cannot be said about an LLC.

And hence, many prefer to convert corporation to LLC without much hesitation.

An LLC is usually taxed as a pass-through entity, meaning that the business does not pay taxes on its income. Instead, the business’s profits and losses “pass through” to the owners, who report their share on their tax returns.

This can lead to a lower overall tax burden than a C corporation. On the other hand, an LLC can have any number of owners.

The owners themselves or managers hired by the owners can run the business.

Compared to a C corporation, where management is usually set up through a board of directors and officers (top-level management), this can give the business more flexibility in how it is run.

The owners of an LLC have limited liability, meaning their assets are usually safe from business debts or liabilities.

This is similar to the limited liability protection that C corporation shareholders get with a few differences.

Compared to a C corporation, an LLC’s ownership structure is more straightforward, making it easier to change ownership or bring in new investors.

Hence, changing from INC to LLC seems like a positive step for the owners.

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Why Go from INC to LLC?

Most people don’t wonder how to change from INC to LLC. It’s always the other way around –for many good reasons.

Unquestionably, both come with their fair share of benefits, but some aspects improve LLCs.

First, if you convert to LLC, you will not have to burden yourself with unnecessary formalities that you would have to in incorporation. Private limited corporations do not bother much with formal meetings and all in that sense.

In terms of taxation, incorporations may burden their owners more. That is because LLCs provide more freedom to the owners and give them the opportunity to decide how they would like to be taxed.

Another major reason to change from corporation to LLC IRS is that this type of business protects you against debts and liabilities. Therefore, as the owner, you will reap the benefits but not be subjected to losses.

In an INC the top management decides the management of the company.

However, that will not be the case with an LLC, which will provide more flexibility for the owners.

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Differences Between Corporations and LLCs

Some significant differences between corporations and LLCs make people go for LLC to INC conversions and vice versa.
Here, we will see what makes them different.

LLC

Corporation

Formation

LLCs are usually formed by businesspeople known as members. It is created by putting together an Operating Agreement. Corporations are formed by filling out corporate documents in the state where it is situated. A board of directors is also created in the process.

Ownership

The members of an LLC have equity interests. This is because they have invested in the business, and their capital is in question. The owners of a corporation are mostly stockholders or shareholders – as they have stocks and shares in the business.

Profits and Losses

Limited liability companies are also pass-through entities as the gains and losses pass through the owners of the business. Corporation owners are not directly responsible for paying for the profits and losses of the business. However, they may indirectly pay through dividends.

Taxation

The taxation rules are more lenient on LLCs – as the taxes are distributed among the owners and the profits/losses they have made. The taxation on corporations is rather severe – to the point where they are even said to have double taxation.

Raising Capital

LLCs can raise capital by taking out loans – the process is more difficult for them in general. Corporations are easily able to raise capital by issuing stocks and bonds.

 

Advantages of Converting from a Corporation to an LLC

The reason why many people change INC to LLC is that it comes with various advantages.

Here, we will be looking into those benefits that will help you decide if you should do it too.

More Flexibility

LLCs are more flexible than corporations regarding how they are run. In a corporation, there must be a board of directors and officers.

Still, a business owner can choose to run the business themselves or hire managers per their requirements and business strategies.

Pass-Through in Taxation

Most LLCs are taxed as pass-through entities, meaning that the business’s income is taxed only once.

But in a corporation, the business is taxed, and then the profits are taxed again when they are given to shareholders as dividends, which can lead to a lower overall tax bill.

Personal Liability Protection

The owners of an LLC have limited personal liability, which means that their assets are usually safe from the business’s debts and liabilities.

In a corporation, shareholders are often held personally responsible for the business’s liabilities.

Ease in Maintenance

A limited liability company (LLC) is easier and cheaper to set up and run than a corporation. LLCs also have less paperwork and rules to follow than corporations.

Not to mention, there are fewer formalities in general as well; hence, little maintenance goes a long way.

Attracts Investors

Investors may be more interested in an LLC than a corporation because of the pass-through taxation and the fact that the management structure can be changed as per strategies.

So, LLCs might be able to expand their businesses efficiently.

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Disadvantages of Converting from a Corporation to an LLC

There are various benefits when you change from INC to LLC, but there are certain disadvantages to consider.

And here, we will be discussing those drawbacks.

Complexity in Conversion

When you convert a corporation to LLC, you need to consider the several complexities along the process.
Not only will you have to go through several formalities, such as filing an IRS form to convert C Corp to LLC, but you also ask for permission from each shareholder.

Cost of Conversion

The cost of conversion is just as high as the complexities. You would have to take care of the legal fees, accounting fees, and all the other costs associated with changing a business structure.

Negative Reputation

The conversion from a corporation to LLC can often create a negative impression on the investors and customers. This may signify that the business lacks commitment or may be unstable.

Tax Implications

Although LLCs have the upper hand in taxation, the sudden change in tax structure may have negative implications.

These implications might end up being burdensome for the members of the LLC.

Ownership Structure Limitations

There will be more freedom in management within the LLC, but the business might face more difficulty issuing stocks. This might result in less attraction of investments in the long run.

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Final Words

Now that you know how to change corporation to LLC, you can start the process if the respective shareholders agree. But before you convert, you need to weigh the advantages and the disadvantages.

It would be best if you moved forward with your decision only when you are sure about it.

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