Converting an LLC to a C Corporation: three routes and how the IRS sees them

Many businesses start out as an LLC because it is easy to set up and flexible to run. At some point that is no longer enough: an investor wants preferred stock, employees are to receive options, or profits are meant to stay in the company and be taxed there at the corporate rate. Then the question is how the LLC becomes a C Corporation. This page shows the three routes, what Delaware requires, how the IRS treats the switch, and what applies when the company comes not from the US but from abroad. It promises no tax savings; which route fits depends on your case.

1Two levels: company law and tax law

In the US there are two answers to the question of what a company is. State company law says whether it is an LLC, a corporation or a partnership. Federal tax law says how the IRS taxes it. The two are connected, but they are not the same thing.

A company formed as a corporation under a statute is always taxed as a corporation under 26 CFR 301.7701-2(b)(1). An LLC, by contrast, is an eligible entity: under 26 CFR 301.7701-3 it may elect. Without an election, a single-member LLC does not exist for tax purposes (a disregarded entity), and a multi-member LLC is a partnership. With an election, it is taxed as an association, in other words like a corporation.

That gives three routes to a corporation. The table puts them side by side; the sections below explain them.

2Route one: the election on Form 8832

The simplest route runs through tax alone. The LLC files Form 8832, Entity Classification Election, with the IRS and elects to be taxed as an association. Nothing changes under company law: the LLC stays an LLC, with an Operating Agreement and membership interests instead of stock. For tax purposes, it now pays corporate tax itself, 21 percent at the federal level.

The timing rules are tight. Under the Instructions for Form 8832, the election can take effect no more than 75 days before it is filed and no more than 12 months after. A copy goes with the company's tax return for the year of the election. And once you have switched, under 26 CFR 301.7701-3(c)(1)(iv) you cannot switch again by election for the next 60 months, unless the IRS permits it because the company is now majority-owned by new owners.

For tax purposes, § 301.7701-3(g) describes what is deemed to happen on the election. If the LLC is a partnership, it contributes all its assets and liabilities to the association in exchange for stock and immediately distributes the stock to its members. If it is a disregarded entity, the owner contributes the LLC's assets and liabilities in exchange for stock.

For a business looking for investors, this route is often just an interim step. Investors buy stock in a corporation, and option plans are built around stock. If you need a corporation under company law as well, choose one of the other two routes.

3Route two: conversion under Delaware law

Delaware lets an LLC convert into a corporation without dissolving. Two provisions work together. 6 Del. C. § 18-216 allows a Delaware LLC to convert into a corporation or another entity type. 8 Del. C. § 265 covers the corporate side: any other entity, expressly including an LLC, can become a Delaware corporation. That also applies to an LLC from another state, provided its own law permits the conversion.

3.1Approval

How the members approve is governed first by the Operating Agreement. If it contains a rule for conversion, that rule applies. If not, the agreement's rule for a merger applies. If that is missing too, and the agreement does not prohibit conversion, § 18-216(b) requires approval by members holding more than 50 percent of the interests in profits. The Operating Agreement can also rule out conversion entirely. So it pays to decide at formation how a later switch will be approved; more on our page about the Operating Agreement.

3.2Filing

Under § 265(b), the company files two documents at the same time: the Certificate of Conversion to Corporation and the Certificate of Incorporation of the future corporation. The Certificate of Conversion states when and where the LLC was formed, its name and type, and the name of the corporation. The company can also adopt a Plan of Conversion setting out the terms and the exchange of interests. Under the fee schedule of August 1, 2026, the state fee is $184 for the conversion and from $109 for the Certificate of Incorporation, plus any outstanding taxes of the converting company.

3.3The effect

Once filed, the LLC is a corporation. Under § 265(f) and § 18-216(c), it is the same entity for purposes of Delaware law: its assets, claims and rights stay with it, as do its debts, and creditors keep their security. There is no winding up and no transfer of individual assets. Under § 265(d), its existence is deemed to have begun when the LLC was formed. Under § 265(j), the members' interests are exchanged for stock or otherwise compensated.

If, on the other hand, the Delaware LLC becomes an entity of another state, it files a Certificate of Conversion to Non-Delaware Entity under § 18-216(e); once that is filed, it ceases to be a Delaware LLC.

4Route three: a new Inc

The third route is forming a new corporation that takes over the business. Either the members contribute their LLC interests to the new Inc in exchange for stock, and the LLC becomes its subsidiary. Or the LLC contributes its assets and distributes the stock to its members. Or the entities merge. In Rev. Rul. 2004-59, the IRS expressly cites Rev. Rul. 84-111, which describes three such routes and shows that they can lead to different tax bases and holding periods.

This route is more cumbersome, because contracts, accounts and permits have to move to a new entity unless they stay with the subsidiary. But it can make sense if the LLC is not in Delaware and its home state has no conversion procedure, or if the LLC is meant to continue as a subsidiary.

5How the IRS sees the conversion

The IRS ruled on the state-law conversion of a partnership in Rev. Rul. 2004-59. If an entity taxed as a partnership converts into a corporation under a statute that requires no actual transfer, it is treated the same as an election under § 301.7701-3. The partnership is deemed to contribute all its assets and liabilities to the corporation in exchange for stock and to distribute the stock immediately to its members. A conversion under 8 Del. C. § 265 requires no transfer: under § 265(f), the assets stay with the entity, which simply changes its legal form.

For a single-member LLC, the regulations describe a change by election as a contribution by the owner in exchange for stock. Exactly how a state-law conversion should be treated for that LLC is part of the tax review before you take the step.

Whether the contribution triggers a gain depends on the rest of the tax code. Under 26 U.S.C. § 351(a), no gain or loss is recognized when property is transferred to a corporation solely in exchange for stock, provided the transferors control the corporation afterward within the meaning of the statute. Whether those conditions are met, whether liabilities, cash or foreign members change the picture, and what the tax basis and holding periods look like afterward must be checked every time. The regulations themselves say the change is to be judged under all relevant provisions and general principles, including the step transaction doctrine.

After the conversion, the corporation's obligations apply. It files Form 1120 every year, and if a foreign person owns at least a quarter of it, Form 5472 as well. How the corporation is taxed in the US is covered on our page on taxation of the US corporation.

And then there is your home country. For your country of residence, the change from LLC to corporation can be a taxable event in its own right, especially if it previously classified the LLC differently from the new corporation. That belongs in the same review, together with your accountant at home.

6Domestication: a foreign company becomes a Delaware corporation

Delaware doesn't only take in companies from other states. Under 8 Del. C. § 388, a company formed under the laws of another country can become a Delaware corporation. To do so, it files a Certificate of Corporate Domestication and a Certificate of Incorporation at the same time. The Certificate of Domestication states when and where the company was formed, its previous name and the jurisdiction where it had its seat or principal place of business. The state fee is $234, plus from $109 for the Certificate of Incorporation.

The condition is in § 388(h): the domestication must be approved in the way the company's governing documents or its home-country law require. So Delaware will take the company in, but Delaware doesn't decide whether it may leave its home country. If the company continues to exist under its home-country law, Delaware treats it as a single company existing under both laws.

7The order of steps in practice

Whether it's an election, a conversion or a new Inc, the steps almost always follow the same order.

• First, the reason. What does the investor require: which classes of stock, what kind of board, which state? A term sheet answers many of these questions.
• Next, the operating agreement. Who has to consent, does the agreement rule out a conversion, are there rights of first refusal or buyout provisions?
• Then tax, in the US and at home, before any document is filed. The effective date is part of that review.
• Then the documents: plan of conversion, Certificate of Conversion and Certificate of Incorporation, bylaws, resolutions of the initial board and the issuance of stock.
• Finally, everything around it: update registrations in other states, inform your bank and business partners, and put the corporation's tax deadlines in the calendar.

If you know from day one that investors are coming, skip the detour and form an Inc right away. What to watch for, from founder shares to the 83(b) election, is on our page Form a Delaware Inc.

8Where the conversion leads

The corporation your LLC turns into is then an ordinary Inc with a board, officers, an annual report and franchise tax. You can also form a Delaware corporation directly through our page Delaware C Corporation, and the overview of all six states is under Form a US corporation. Bringing an entire European business under a Delaware company is a related but separate process, described on our page on the Delaware flip.

In short

• Corporate law and tax law are two separate levels: an LLC can become a corporation, or it can stay an LLC and simply be taxed like a corporation.
• An election on Form 8832 can take effect no more than 75 days back and no more than 12 months ahead; after that, another change is barred for 60 months.
• In Delaware, an LLC becomes a corporation under 6 Del. C. § 18-216 and 8 Del. C. § 265 without winding up; it remains the same company with its contracts, assets and debts.
• For a partnership, the IRS treats the conversion under Rev. Rul. 2004-59 as a contribution of all assets to the corporation in exchange for stock, followed by a distribution to the members.
• A foreign company can become a Delaware corporation under 8 Del. C. § 388 if its home-country law allows it.

How we help you

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