Converting an LLC to a C corporation
Conversion, merger or check-the-box: generally tax-free under §351, $60,000 of members' capital becomes stock and APIC, and the QSBS clock starts that day.
Plenty of companies start as LLCs and convert when they raise money. There are three ways to get there, and they differ in paperwork, not usually in result.
Each route is, at heart, owners transferring property to a corporation for its stock. That is a §351 exchange, with no gain or loss recognized, when the transferors hold at least 80% of the vote and of every other class right after — which converting owners do, since they get all of it.
What the books record
Suppose Northwind had started as an LLC with the founders' $60,000 in two capital accounts, and converted into the charter it has now: 8,000,000 shares issued at $0.00001 par. The capital accounts close into common stock at par, $80, and additional paid-in capital, $59,920.
LLC converts to corporation
| Account | Debit | Credit |
|---|---|---|
| 3010Member capital — founder A | 30,000.00 | |
| 3020Member capital — founder B | 30,000.00 | |
| 3000Common stock | 80.00 | |
| 3050Additional paid-in capital | 59,920.00 | |
| Balanced | 60,000.00 | 60,000.00 |
If Northwind had been an LLC: the conversion, on the equity side.
When an LLC is the right answer
Stay an LLC
- Good at
- One layer of tax on profit paid out every year.
- Losses — real estate depreciation, early losses — reach the owners.
- Flexible allocations among owners.
- Watch for
- Not what venture investors buy.
- No ISOs, no QSBS.
- Best for
- Services firms that distribute their profit, real estate, holding companies, family businesses.
Convert to a C corporation
- Good at
- Preferred stock, option plans, QSBS from the conversion date.
- Generally tax-free under §351.
- Watch for
- A filing, new documents, a final partnership return.
- The second layer of tax on future dividends.
- Best for
- A company about to raise a priced round or grant employee options.
Converting is usually tax-free under §351; what it changes is the paperwork, the QSBS clock and the next decade's tax on dividends.
In this lesson: statutory conversion, step by step, and the check-the-box route.
Pages in this lesson
2 pages go deeper, about 7 minutes in all. Read them in order, or open the one you need.
Where this lesson's rules come from
The sources behind this lesson's requirements, by kind. Anything marked as a convention is ours, not the rule-maker's.
- Federal statute
- 26 U.S.C. §351(a) (opens in a new tab)Transfers to a corporation the transferors controlFree to read
- 26 U.S.C. §368(c) (opens in a new tab)Control: 80% of the combined vote and 80% of every other class of stockFree to read
- 26 U.S.C. §1202(c)(1), (d)(1), (i)(1) (opens in a new tab)Qualified small business stock is stock in a C corporation — and converted property starts the clock at conversionFree to read
- Federal regulation
- Treas. Reg. §301.7701-3(g)(1)(i) (opens in a new tab)An elective change from partnership to corporation, and what it is deemed to beFree to read
- IRS guidance
- Rev. Rul. 2004-59, 2004-24 I.R.B. (opens in a new tab)A partnership's formless conversion into a corporation is treated as assets-overFree to read
- State authority
- 8 Del. C. §265(b), (f), (g) (opens in a new tab)Conversion of an LLC or other entity into a Delaware corporationFree to read
The words this lesson teaches
Each links to its glossary definition, which also names the authority behind it and the components that render it.
- Statutory conversionChanging an entity's legal form under a state conversion statute — an LLC becoming a Delaware corporation under 8 Del. C. §265 — so the converted corporation is the same entity and nothing is wound up. For tax, a partnership's conversion is treated as a transfer of its assets to the corporation for stock, followed by a distribution of the stock to the partners
- Section 351 exchangeA transfer of property to a corporation solely for its stock, with no gain or loss recognized when the transferors control it immediately after — at least 80% of the combined vote and 80% of every other class of stock
- Check-the-box electionThe election on Form 8832 by which an eligible entity — an LLC or a partnership, never a corporation formed under a state's corporation statute — chooses its federal tax classification. Effective no more than 75 days before or 12 months after it is filed, and after a change, no second change for 60 months
- APICWhat shareholders paid for stock above its par value, plus the credit side of stock-based compensation — part of contributed capital within equity
- Qualified small business stockOriginal-issue stock of a domestic C corporation with gross assets of $75 million or less at issuance that lets holders exclude gain on sale — for stock issued after July 4, 2025, 50% after three years, 75% after four and 100% after five, up to the greater of $15 million or ten times basis per issuer. Stock issued earlier keeps the old rules: $50 million of gross assets, five years, $10 million
In the founder glossary
This lesson’s ideas, explained for the founder running the company. Each has an entry in the founder glossary.
See also
- Journal entry for issuing common stockWhen shares are issued for cash, debit Cash for the proceeds, credit Common stock for the par value of the shares, and credit Additional paid-in capital for everything above par.
- 83(b) electionA filing that tells the IRS to tax restricted stock when you receive it, not as it vests. It has to be filed within 30 days of the transfer, and there's no extension.