Converting an LLC to a Corporation or S Corporation in Delaware
If you are planning on converting an LLC to a corporation in Delaware, here's what you need to know.
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The details of how to convert your Delaware limited liability company (LLC) to a Delaware corporation will vary depending on your specific situation. However, here is some general guidance on the process.
Delaware’s Conversion Statute
In Delaware, you can use a relatively new, simplified procedure that allows you to convert your business from an LLC to a corporation largely by filing a few basic forms with the Secretary of State. This procedure, technically known as “statutory conversion,” will automatically transfer your LLC’s assets and liabilities to the new corporation. Unlike other methods of conversion, only one business entity is involved—you do not need to separately form a corporation before the conversion can occur. There is no need to dissolve your LLC; on the contrary, under Delaware’s conversion statute, the one business entity involved in the conversion, which is originally an LLC, is simply considered by default to continue its existence in the form of a corporation. The conversion procedure is codified primarily in Section 8-265 of the Delaware Code (Del. C.).
To convert your Delaware LLC to a Delaware corporation, you need to:
- get the LLC’s members to approve the conversion; and
- file a certificate of conversion and certificate of incorporation with the Secretary of State.
Delaware’s conversion statute requires that your LLC approve the conversion before you file the necessary paperwork with the Secretary of State. The statute is very general regarding what is necessary for approval, stating simply that the conversion must be approved in whatever manner is specified by the appropriate LLC documents. In some cases, this will mean a simple majority vote of your LLC shareholders; however, you should check your LLC’s certificate of formation and operating agreement to make sure. (You can find the exact language regarding statutory approval requirements at Del. C. § 8-265(h).)
The certificate of conversion is a relatively simple document that provides basic information primarily about your LLC, such as its name, the state where it was formed, and the date it was formed, as well as the name of the new corporation. Similarly, the certificate of incorporation will contain basic information about the name and registered office of your new corporation, the name of the corporation’s registered agent if you have one, the name and address of the person incorporating the LLC, and basic information about the value and number of shares of corporate stock; other information may be included, as well. The Delaware Secretary of State makes available a PDF file containing blank templates of the certificate of conversion and certificate of incorporation, along with a form letter providing limited instructions regarding filing of the certificates. Note that while the certificate of conversion and certificate of incorporation may appear simple, some of the issues involved in converting your particular business may involve unexpected complications, particularly with regard to the certificate of incorporation; therefore, it may be advisable to consult with a business attorney before completing these documents.
The basic filing fees for this process can vary depending on how many pages are involved and whether you want certified copies; however, the minimum cost would be about $253, which includes $164 to file a one-page certificate of conversion and $89 to file a one-page certificate of incorporation. The state asks that you include a cover letter with contact information with your filing.
Keep in mind that Delaware’s conversion statute makes clear not only that all of the LLC’s property, as well as debts, are automatically transferred to the new corporation, but also that all rights of creditors against the LLC continue against the new corporation, all LLC debts and liabilities continue in force against the new LLC, and all legal actions involving the LLC “remain vested in” the new corporation. For more information, check Del. C. § 8-265(f).
The foregoing information explains the basic steps for converting from an LLC to a C Corporation. If you want to convert to an S Corporation, you will also need to file IRS Form 2553.
Apart from the foregoing steps, you will also need to take care of all the tasks normally associated with creating and maintaining a new corporation, such as:
- drafting corporate bylaws
- electing corporate officers and appointing corporate directors
- holding an initial board meeting
- issuing stock certificates
- using the official corporation name on your business documents; and
- filing the required annual report with the state.
It’s important that you follow all of these required formalities in order to ensure that your business continues to have limited liability and can take advantage of various potential tax benefits. For a more complete discussion of the steps involved in forming a corporation, consult Incorporate Your Business: A Legal Guide to Forming a Corporation in Your State, by Anthony Mancuso (Nolo).
One other key step in the conversion process is to make sure that no business contracts or agreements, such as bank documents, leases, licenses, and insurance, will be nullified by your business’s entity change.
The IRS makes clear in a 2004 bulletin that, generally speaking, it will tax a statutory conversion as though the LLC members formally transferred all LLC assets and liabilities to the corporation in exchange for stock, and then immediately liquidated the LLC. However, the specific tax consequences for LLC-to-corporation conversions vary from one case to the next. Because the tax consequences can sometimes be significant, you should consult with a tax adviser before undertaking any conversion.
Other Considerations and Information
Our main concern here has been converting the legal form of your business from an LLC to a corporation. However, if you’re seeking to convert your LLC’s tax status from partnership to corporation without changing the LLC’s legal form, you only need to file IRS Form 8832 (to be taxed as a C Corporation) or IRS Form 2553 (to be taxed as an S corporation). (By default, the IRS taxes a multi-member LLC as a partnership and a single-member LLC as a so-called “disregarded entity;” there is no separate IRS tax category for LLCs.) While the IRS forms for changing tax status are fairly straightforward, be aware that this procedure—known as “Check-the-Box”—involves special eligibility criteria; you can find those criteria in the instructions included with the forms.
Keep in mind that certain considerations may affect the timing of your conversion. For example, if you are converting to a C Corporation in order to make your business more attractive to outside investors, you will probably need to convert before any investment occurs. Conversely, if outside investors are not at issue, but the specific nature of your LLC’s assets and liabilities will lead to an undesirable tax burden for the current tax year, you may need to at least temporarily delay the conversion.
For additional guidance on converting from an LLC to a corporation, check Corporations and S Corporations vs. LLCs. For information on conversion rules in other states, check Nolo’s 50-State Guide to Converting an LLC to a Corporation.