# 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.

Source: https://lopifi.com/learn/convert-llc-to-c-corp
Part of: Lopifi — US GAAP books on autopilot, checked by a CPA (https://lopifi.com)

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**How do I convert an LLC to a C corp, and what are the tax consequences?** 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.

| Route | What happens under state law | Tax treatment |
| --- | --- | --- |
| [Statutory conversion](https://lopifi.com/md/learn/convert-llc-to-c-corp/statutory-conversion) | The LLC becomes a corporation by one filing; same entity | As if the partnership contributed its assets for stock and distributed the stock |
| Merger into a new corporation | A new corporation is formed and the LLC merges into it | Depends on the form the steps take; the preparer works it |
| [Check-the-box](https://lopifi.com/md/learn/convert-llc-to-c-corp/check-the-box-conversion) | Nothing — it stays an LLC | Form 8832: deemed contribution for stock, then distribution |

Three routes from an LLC to a corporation.

> “The partnership contributes all of its assets and liabilities to the association in exchange for stock in the association, and immediately thereafter, the partnership liquidates by distributing the stock of the association to its partners.”

— [Treas. Reg. §301.7701-3(g)(1)(i)](https://www.law.cornell.edu/cfr/text/26/301.7701-3), An elective change from partnership to corporation, and what it is deemed to be

Each route is, at heart, owners transferring property to a corporation for its stock. That is a [§351 exchange](https://lopifi.com/md/glossary/section-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.

> “No gain or loss shall be recognized if property is transferred to a corporation by one or more persons solely in exchange for stock in such corporation and immediately after the exchange such person or persons are in control (as defined in section 368(c)) of the corporation.”

— [26 U.S.C. §351(a)](https://www.law.cornell.edu/uscode/text/26/351), Transfers to a corporation the transferors control

— [26 U.S.C. §368(c)](https://www.law.cornell.edu/uscode/text/26/368), Control: 80% of the combined vote and 80% of every other class of stock

## 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](https://lopifi.com/md/glossary/apic), $59,920.

*[Figure: period lock]*

The conversion date is a cut-off in the books: members' capital before, stockholders' equity after. Illustrative.

> **QSBS starts at conversion.** Stock received for property — which is what converting members receive — is treated as acquired on the day of the exchange, with a basis for QSBS purposes of at least the property's fair market value then. So the QSBS holding period starts at conversion, not at the LLC's formation, and only growth after it can be excluded.

> “shall in no event be less than the fair market value of the property exchanged”

— [26 U.S.C. §1202(c)(1), (d)(1), (i)(1)](https://www.law.cornell.edu/uscode/text/26/1202), Qualified small business stock is stock in a C corporation — and converted property starts the clock at conversion

## When an LLC is the right answer

**Stay an LLC**
- Pro: One layer of tax on profit paid out every year.
- Pro: Losses — real estate depreciation, early losses — reach the owners.
- Pro: Flexible allocations among owners.
- Con: Not what venture investors buy.
- Con: No ISOs, no QSBS.
- Best for: Services firms that distribute their profit, real estate, holding companies, family businesses.

**Convert to a C corporation**
- Pro: Preferred stock, option plans, QSBS from the conversion date.
- Pro: Generally tax-free under §351.
- Con: A filing, new documents, a final partnership return.
- Con: The second layer of tax on future dividends.
- Best for: A company about to raise a priced round or grant employee options.

Stay an LLC, or convert.

> **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](https://lopifi.com/md/learn/convert-llc-to-c-corp/statutory-conversion), step by step, and [the check-the-box route](https://lopifi.com/md/learn/convert-llc-to-c-corp/check-the-box-conversion).

## Pages in this lesson

- [Statutory conversion](https://lopifi.com/md/learn/convert-llc-to-c-corp/statutory-conversion) — 4 min. How does a statutory conversion from LLC to corporation work?
- [Check-the-box election](https://lopifi.com/md/learn/convert-llc-to-c-corp/check-the-box-conversion) — 3 min. Can an LLC elect to be taxed as a C corporation?

## Where this lesson's rules come from

- [8 Del. C. §265(b), (f), (g)](https://delcode.delaware.gov/title8/c001/sc09/index.html) — Conversion of an LLC or other entity into a Delaware corporation (state)
- [Treas. Reg. §301.7701-3(g)(1)(i)](https://www.law.cornell.edu/cfr/text/26/301.7701-3) — An elective change from partnership to corporation, and what it is deemed to be (regulation)
- [26 U.S.C. §351(a)](https://www.law.cornell.edu/uscode/text/26/351) — Transfers to a corporation the transferors control (statute)
- [26 U.S.C. §368(c)](https://www.law.cornell.edu/uscode/text/26/368) — Control: 80% of the combined vote and 80% of every other class of stock (statute)
- [26 U.S.C. §1202(c)(1), (d)(1), (i)(1)](https://www.law.cornell.edu/uscode/text/26/1202) — Qualified small business stock is stock in a C corporation — and converted property starts the clock at conversion (statute)
- [Rev. Rul. 2004-59, 2004-24 I.R.B.](https://www.irs.gov/irb/2004-24_IRB) — A partnership's formless conversion into a corporation is treated as assets-over (irs)

## Read further

- https://lopifi.com/md/journal-entries/issuing-common-stock
- https://lopifi.com/md/accounting/qsbs
- https://lopifi.com/md/accounting/83b-election

- **Track:** [Entity types](https://lopifi.com/md/learn/entities)
- **Lesson:** Lesson 5 of 9 — 9 min
- **Terms taught:** [Statutory conversion](https://lopifi.com/md/glossary/statutory-conversion), [Section 351 exchange](https://lopifi.com/md/glossary/section-351-exchange), [Check-the-box election](https://lopifi.com/md/glossary/check-the-box-election), [APIC](https://lopifi.com/md/glossary/apic), [Qualified small business stock](https://lopifi.com/md/glossary/qualified-small-business-stock)
- **Previous:** [Why startups are Delaware C corporations, Entities · Lesson 4](https://lopifi.com/md/learn/why-startups-are-delaware-c-corps)
- **Next:** [Statutory conversion](https://lopifi.com/md/learn/convert-llc-to-c-corp/statutory-conversion)
- **The course:** https://lopifi.com/md/learn