Considerations For Converting Your LLC To A C Corporation
By Louisa Else, Tax Practice Leader
It's one of the most common things we see in our start-up world: the little idea you put some money into is growing and it's time to bring in outside investors to really push your business forward. There's only one catch - none of your investors want to invest in your LLC, so you begin the process to convert to a C Corporation.
While the lawyers will spearhead the conversion process, it is so important to keep your accounting and tax teams involved from the very beginning. While these conversions are generally tax neutral transactions, there are times that there can be tax implications for the partners of the LLC, and it's important that these conversations happen prior to the conversion happening, because there are likely options to get around those tax consequences if discussed prior to completing the conversion.
There are a number of things to consider as you are working through the process. Some of the bigger items are:
- What form will the conversion take? There are different ways that your legal team could structure the transaction, and all will have some different accounting and tax considerations. In some cases, documents of conversion are filed for the company and the company remains intact otherwise. In other transactions, a new C Corporation company is formed either prior to or immediately after the transaction and the LLC interests are contributed over to the new company.
- Will the company have a new EIN? This will be determined by the structure of the transaction.
- What is the timing of the transaction? Will it be done at the end of period, or in the middle of the month? Any transaction done mid month or even mid year will add additional accounting and tax considerations.
From the tax and accounting side, these are the questions we are going to work through:
- Do you need a new QuickBooks file? We recommend a new QuickBooks (or other accounting system) with any new EIN. This is because even though you feel like business is continuing as normal, you have actually started a brand new business and the accounting starts fresh.
- What expenses and other activity were incurred by the LLC prior to conversion? Allocating activity between the LLC and Inc is straightforward for day to day transactions, but takes some additional diligence for work performed that is not invoiced right away - for example, there may be an invoice for legal work pertaining to the LLC that isn't received until 2 weeks after the conversion has happened. This still needs to be captured as part of the LLC's activity. Other things to take into consideration may be any distributions that should be paid to partners as part of the LLC, like estimated tax payments.
- When is the final LLC tax return due? No matter how your conversion is structured, for tax purposes there will need to be a final LLC return and an initial Inc return filed. Unless the conversion happens at 11:59pm on December 31st, that means you are going to have two tax returns to file in the year of the conversion.