Building your own business is both exciting and nerve-wracking. There are so many decisions to be made, not the least of which is what type of entity you should choose for your business structure. For those concerned about personal liability, setting up as an LLC often hits the sweet spot. It provides tremendous flexibility for how to manage and run your business while keeping personal assets out of reach. Once the business grows, however, many opt to expand into structures that provide greater opportunities to raise funds by going public, as well as to issue shares to founders, employees, and investors. If this describes you and you’re considering converting from an LLC, there are a few tax issues worth considering before you move forward.
C corporations and LLCs are taxed differently by the federal government. C corporations are required to pay taxes on their profits, but they often distribute dividends to shareholders, and these are taxed again, on an individual basis. This represents a type of double taxation that LLCs are not subject to. Rather than paying corporate income tax, their earnings get passed through for each member to pay on their individual income tax return.
Business owners considering a conversion from LLC into C corporation will need to submit appropriate forms and adhere to all rules regarding meetings and record-keeping requirements. They will need to set up a board of directors, and will also need a new employer identification number (EIN) specific to the corporation’s income tax and payroll tax requirements. Planning ahead for this process will save some headaches, as those businesses that make the jump in the middle of the tax year will end up with their LLC EIN and their C Corp EIN, and will have to file taxes using both. To avoid this unnecessary complication and the need to file a separate return for each of the entities in operation during the course of a single year, it is strongly encouraged to formalize the change at year’s end so that the New Year represents a new business entity’s start.
Making the jump from an LLC to a C corporation represents a significant move for your business, and is a decision that should not be taken lightly. It is advisable to seek professional guidance for help navigating this shift and ensuring that you have fulfilled all of your legal and financial obligations during the process.
About Frank Jenkins Jr
Frank Jenkins Jr. CPA is the managing partner of Adams, Jenkins & Cheatham, a CPA practice based in Midlothian, VA. Frank specializes in Consulting services, tax planning, audit & assurances. "I genuinely care about our clients because I have a personal connection with them." He is active in the community and belongs to the AICPA and the VSCPA.
