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Tax Implications of Converting From an LLC to a C-corp to Consider

Tax Implications of Converting From an LLC to a C-corp to Consider

Written by 
Darin Moriki
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Published: 
February 28, 2022
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Tax Implications of Converting From an LLC to a C-corp to Consider

When you’re just getting your company off the ground, forming a limited liability company rather than a C corporation can come with its fair share of benefits. 

On one hand, limited liability companies, or LLCs, are generally easier to set up and can give you more flexibility when it comes to operating your business than C corporations, or C-corps. 

Much like a C-corp, an LLC can also protect your personal finances from legal claims that may be filed against your business.  

Although forming an LLC can be a particularly attractive option when your company is in its very early stages, eventually converting it into a C-corp will make it easier for you to raise capital from investors and offer equity to employees.

Tax Related Changes to Consider

If you’re planning to convert your LLC into a C-corp, timing will be key for any tax-related changes that need to happen. 

When you convert your business from a partnership or LLC to a corporation, you must apply for a new employer ID number that will be used for income tax and payroll tax reporting purposes. 

“It’s generally tied to your bank accounts,” Pilot Senior Tax Manager John McManus explained during a webinar on startup taxes. “It’s the business equivalent of your social security number.” 

In some cases, this process alone can take days or weeks, so planning out the conversion ahead of time can go a long way.    

To that end, your taxes may be impacted by the effective date of the conversion, since the LLC and C-corp would have two different employee ID numbers. For instance, if your LLC converts to a corporation on July 1, you must file two income tax returns — one for the LLC covering the pre-conversion part of the year and a corporate tax return covering the rest of the year.

“It sort of breaks the year into two for tax purposes,” McManus said. 

You can avoid this hassle of filing two separate tax returns by planning for the conversion ahead of time and scheduling it to take place on December 31 at the end of a tax year.

“That's sort of a sweet spot,” McManus said. “If you can do that conversion at the end of a year, you're simplifying some things from an income tax perspective because you can just cut off that old LLC return at the end of the year, consider that final, and then file as a corporation going forward.” 

Talk to an Expert

Converting your company from an LLC to a corporation and deciding whether you should do it can be tricky, so get in touch with an experienced startup tax provider and outsourced CFO team that can guide you through the process. 

Want to learn more about other common tax issues, such as what you should consider when hiring remote employees? Check out Pilot’s in-depth webinar on startup taxes.

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