C Corporations (C Corps) and Limited Liability Companies (LLCs) are two of the most often used business entities in the US. Due to its simplicity, adaptability, and pass-through taxation, LLCs are typically the preferred choice for small businesses. C Corps, on the other hand, are frequently employed for bigger enterprises with ambitions to go public and who need more official arrangements. However, as your company expands, you could realize that switching from an LLC to a C Corp is the best course for you. This post will cover the transition from an LLC to a C Corp, when to do it, and what it means for your company.
Yes, when you switch from an LLC to a corporation, you will need to get a new Employer Identification Number (EIN). An EIN is a distinct nine-digit number that serves as your company’s tax identification number. A corporation is a separate legal entity than an LLC, hence the new EIN is required. By mail or online at the IRS website, you can request a new EIN.
Most jurisdictions accept a procedure called “conversion,” which allows you to convert your LLC into a corporation. Nevertheless, the procedure could change according on the state you’re in. The method typically includes the following steps:
1. To find out if your LLC can be transformed into a corporation, review your operating agreement and state legislation.
2. Write up articles of conversion and submit them to the secretary of state of the state. 3. Amend the bylaws of the corporation and pass a resolution approving the conversion. 4. Acquire any required licenses and permits. 5. Let your customers and creditors know about the conversion. 6. Obtain a fresh EIN.
There is no set period of time during which you must transform your LLC into a C Corp. Making the switch, nevertheless, might be advantageous in some circumstances. For instance, if your company has had substantial growth and you are now looking for investors, a C Corp form might be more appealing to them. The reason is that C Corps can issue various classes of stock and have more formal organizational frameworks, which facilitates raising funds. Additionally, a C Corp structure is necessary if you intend to go public in the future.
C Corporations are taxed differently than LLCs. Shareholders of C Corporations pay personal income tax on the dividends they get from the company, and C Corporations pay corporate income tax on their profits. The flat 21% corporate income tax rate is lower than the highest individual income tax rate. C Corps, on the other hand, may be subject to double taxation, which results in the same profits being taxed at both the corporate and individual levels. When determining whether to change from an LLC to a C Corp, this is something to take into account.
To sum up, changing from an LLC to a C Corp can be a difficult procedure, but it might be the best course of action for your company. Remember that your company’s needs and goals should guide your decision to convert. If you’re thinking about switching, go to a tax expert or lawyer to figure out the best course of action.