# Statutory conversion

> One filing changes the legal form; for tax it's treated as a contribution of assets for stock and a distribution of the stock.

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

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**How does a statutory conversion from LLC to corporation work?** One filing changes the legal form; for tax it's treated as a contribution of assets for stock and a distribution of the stock.

A [statutory conversion](https://lopifi.com/md/glossary/statutory-conversion) changes the entity's legal form in one filing. Delaware lets an LLC become a Delaware corporation by filing a certificate of conversion and a certificate of incorporation. The corporation is, for Delaware law, the same entity as the LLC, and the LLC doesn't wind up its affairs or pay off its liabilities to get there: what it owned and owed stays with it.

> “shall, for all purposes of the laws of the State of Delaware, be deemed to be the same entity as the converting other entity.”

— [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

For tax, an LLC taxed as a partnership that converts this way is treated as if the partnership had contributed all its assets and liabilities to the corporation for stock and then handed the stock to its members. The contribution is a [§351 exchange](https://lopifi.com/md/glossary/section-351-exchange) when the members control the corporation right after, so it is generally tax-free — subject to the exceptions §351 itself has, such as liabilities above basis, which the preparer checks.

— [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

> “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

1. **Approve.** The members approve the conversion as the operating agreement requires, and the board-to-be adopts bylaws.
2. **File with Delaware.** File the certificate of conversion and the certificate of incorporation with the Division of Corporations.
3. **Issue stock.** Issue shares to the members for their interests; founders' new stock may need new vesting and an 83(b) election within 30 days if it is restricted.
4. **Close the tax year.** Have the preparer close the LLC's partnership tax year at the conversion; the corporation files Form 1120 from then on.
5. **Tell everyone else.** Re-qualify or amend registrations in each state where the company is qualified, and update the bank and payroll provider.

A Delaware LLC converting to a Delaware corporation, in order.

## Where this page'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)
- [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)
- [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)

- **Track:** [Entity types](https://lopifi.com/md/learn/entities)
- **Part of:** [Converting an LLC to a C corporation](https://lopifi.com/md/learn/convert-llc-to-c-corp) — 4 min
- **Terms taught:** [Statutory conversion](https://lopifi.com/md/glossary/statutory-conversion), [Section 351 exchange](https://lopifi.com/md/glossary/section-351-exchange), [83(b) election](https://lopifi.com/md/glossary/83-b-election)
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