Converting an LLC to a C-Corp: When, Why, and How

The usual trigger is a venture term sheet. Venture funds are limited partnerships whose investors include endowments, foundations, pension funds and foreign investors. Operating income from an LLC taxed as a partnership flows through the fund to those investors, which creates unrelated business taxable income for tax-exempt investors and US trade-or-business exposure for foreign ones. Funds avoid that by investing in C-corporations.

There are other reasons. Incentive stock options under IRC §422 can be granted only by corporations. The Qualified Small Business Stock exclusion under IRC §1202 applies only to C-corporation stock. And the standard financing documents (SAFEs, NVCA forms) are drafted for Delaware corporations.

The most common route is a statutory conversion. A Delaware LLC converts into a Delaware corporation under DGCL §265 and Delaware LLC Act §18-216 by filing a certificate of conversion together with a certificate of incorporation. The entity keeps its contracts, assets and liabilities, and membership interests become shares of stock by operation of law. A non-Delaware LLC can do the same if its home state allows outbound conversions.

The alternatives are a statutory merger of the LLC into a newly formed corporation, or a contribution of the LLC's assets or membership interests to a new corporation for stock. These are used when a statutory conversion is unavailable or when lawyers want a specific structure for liability, contract assignment or tax reasons.

For tax purposes, a state-law conversion of an LLC taxed as a partnership is treated under Rev. Rul. 2004-59 as an assets-over transfer: the partnership contributes its assets and liabilities to the corporation for stock, then distributes the stock to its members. A single-member LLC that was disregarded is treated as its owner contributing the assets directly.

A conversion is generally tax-free under IRC §351 if the transferors control at least 80% of the corporation's stock immediately afterward, which is normally true when the members simply become the stockholders.

The main exceptions:

• Liabilities over basis. If the corporation assumes liabilities greater than the tax basis of the assets transferred, the excess is taxable gain under IRC §357(c). Cash-basis LLCs with payables and little asset basis should check this.
• Partnership items. Section 704(c) built-in gain, special allocations and depreciation recapture under §§1245 and 1250 all carry over in the basis calculations, so the members' stock basis may be very different from what they expect.
• The final partnership return. The LLC files a final Form 1065 for the short year ending on the conversion date, and the corporation files Form 1120 from that date.

No Form 8832 is needed for a state-law corporation; it is a corporation for federal tax purposes automatically. On the EIN, IRS guidance says a partnership that incorporates generally needs a new EIN, so confirm the treatment before you update payroll, bank and state accounts.

1. Approve the conversion under the LLC agreement, usually by the members' required vote, and approve the plan of conversion and conversion ratio.
2. Have counsel draft the certificate of incorporation, including authorized common and preferred shares and par value.
3. File the certificate of conversion and the certificate of incorporation together with the Delaware Division of Corporations. Under the fee schedule revised August 1, 2026, the conversion fee is $184 and the certificate of incorporation starts at $109, so the minimum is $293 before expedite fees. A Delaware LLC must also be current on its $400 annual LLC tax.
4. Adopt bylaws, elect directors and hold an organizational board meeting.
5. Issue shares to the former members based on the conversion ratio and record them on the cap table.
6. Re-paper equity: replace profits interests with stock or options, adopt an equity incentive plan and get a 409A valuation before granting options.
7. Update federal and state registrations, including foreign qualifications in states where you operate.

Afterward the corporation files the Delaware franchise tax report by March 1 each year, at least $175 under the Authorized Shares Method or $400 under the Assumed Par Value Capital Method, plus a $50 report fee.

A conversion can trigger taxable gain when the corporation takes on more liabilities than the tax basis of the assets it receives. A hypothetical cash-basis LLC shows how.

The LLC has $30,000 of cash and equipment with a $10,000 tax basis, so total asset basis is $40,000. It owes $70,000: a $50,000 bank loan and $20,000 on company credit cards for interest and supplies already deducted. Under IRC §357(c), the excess of liabilities over basis is gain. At first glance that is $70,000 minus $40,000, or $30,000 of gain.

The cash-basis exception changes the answer. Section 357(c)(3) excludes liabilities whose payment would give rise to a deduction, which typically covers a cash-basis company's unpaid deductible expenses. The rules here are technical, so treat this as an illustration: if the $20,000 card balance qualifies, countable liabilities fall to $50,000 and the gain to $10,000.

The fix is usually simple once you spot it. Members can contribute cash before the conversion, or the LLC can pay down debt, so that asset basis covers the liabilities. Run this calculation with your CPA before filing, not when preparing the final Form 1065.

After the conversion the company is taxed as a C-corporation from the effective date, and several routines change at once.

• Founder pay. Partners generally cannot be W-2 employees of their own partnership, but shareholder-employees of a corporation can and should be on payroll. Set up payroll before the first post-conversion pay date.
• Tax filings. The LLC files a final Form 1065 for the short year ending on the conversion date. The corporation files Form 1120 from that date and pays the 21% federal rate on its profits.
• Delaware. The $400 annual LLC tax due June 1 is replaced by the corporate annual report and franchise tax due March 1.
• State registrations. Update foreign qualifications, payroll and sales tax accounts where the state treats the conversion as a new taxpayer.
• Equity records. Record each holder's shares and the conversion-date fair market value, which sets the QSBS basis and starts the holding period. Keep this file with your QSBS documentation.

The EIN question is worth settling early. Banks, payroll providers and states all key off it, and changing it mid-year is harder than getting it right before the conversion date.

Convert before the value climbs. For QSBS, stock received in the conversion is treated as issued on the conversion date, and the holding period starts then, not when the LLC was formed. Under IRC §1202(i), the stock's basis for QSBS purposes is at least the fair market value of what was contributed, so appreciation built up inside the LLC before conversion is not excludable.

For example, if an LLC is worth $500,000 when it converts and is later sold for $20 million, up to $19.5 million of gain is potential QSBS gain, subject to the cap. For stock issued after July 4, 2025, the cap is the greater of $15 million or 10 times basis per issuer, with a 50%, 75% or 100% exclusion after three, four or five years, and the company's gross assets must be $75 million or less at issuance.

If founders' new shares are subject to vesting, each founder must file an 83(b) election within 30 days of receiving them; there is no extension. Converting at the same time as a priced round also invites step-transaction questions. Plan to finish the conversion several weeks before the round closes. This is general information, not tax advice for your specific facts.