How to Convert from an LLC to a Delaware C Corp
One of the most common questions we receive from startup founders is, “When should we convert from an LLC to a C corporation?” While the transition may appear straightforward, several legal and tax considerations must be considered.
Having guided numerous entrepreneurs through this process, particularly in the pharma, life science, tech, and SaaS sectors, we’ve seen firsthand how strategic this conversion can be—especially when raising capital or preparing for growth.
In this guide, we’ll walk you through the benefits of converting to a C corp, the steps required for conversion, and the tax implications of this change. This way, you and your tax advisor can ensure your startup or business is ready to grow with the most efficient tax burden possible.
Why convert from an LLC to a Delaware C corporation?
Many startups begin as LLCs due to their flexibility and the pass-through tax benefits, which are useful in the early stages when companies are often losing money. LLCs are also very quick to form, and some founders do not want to spend the time and effort to start as a corporation before they see signs of success.
However, as your business scales, particularly in high-tech-driven industries, startups will need to attract investors and issue stock options, often leading companies to transition to a C corporation structure.
A C corp allows companies to more easily:
- Issue different classes of stock to investors
- Create stock option plans for employees
- Raise capital through multiple funding rounds
- Take advantage of tax benefits like QSBS
- Structure future exits (IPO or acquisition)
- Protect founders with clearer liability shields
This is why venture capitalists strongly prefer C Corps — they're built for growth, from raising capital to eventual exits.
How to convert from an LLC to a C corp
You can incorporate your business in any state in the US. Delaware is the most popular state for incorporation because of its business-friendly laws, though a company can incorporate in any state.
Here's how the conversion process typically works:
1. Draft the plan of conversion with legal counsel
Your legal counsel will draft a formal plan of conversion, which outlines how the LLC’s member interests will convert to shares of the new C corporation.
Depending on your LLC’s structure, this may require input from company CPAs or tax advisors to ensure the transition is tax-efficient.
2. Obtain member approval from existing equity holders
If your LLC has multiple members, you will need to obtain their approval to move forward with the conversion.
Voting requirements for a conversion are generally outlined in your LLC’s operating agreement. However, in most cases, the process will require a majority vote of all of the existing members of the LLC. If you are the only member, then this is straightforward.
3. File certificates of conversion and incorporation
File certificates of conversion and incorporation with your state's Secretary of State to make the conversion official. You'll also need to sort out whether you need a new EIN (Employer Identification Number) or can keep your current one.
Don't rush this process. Working with experienced advisors to time and structure your conversion properly can save you significant headaches — and potentially serious money — as your company grows.
4. Adopt corporate bylaws
Once your C corporation is established, you must put some corporate bylaws in place. These bylaws will replace the LLC’s operating agreement and govern how the corporation will be managed moving forward.
When drafting these bylaws, make sure to use a lawyer familiar with corporate governance in your state of incorporation. By using an experienced lawyer, you'll ensure your bylaws are both legally sound and flexible enough to support your growth plans — from future funding rounds to potential exits.
What are the tax implications of converting to a C corp?
The tax consequences of converting from an LLC to a C corporation are significant and require careful planning. Here are the main tax considerations you’ll need to understand before you choose to convert:
1. End of beneficial pass-through taxation
LLCs benefit from pass-through taxation, where profits and losses are passed directly to the members. Once you convert to a C corporation, this benefit disappears, and the company needs to deal with corporate income tax at both state and federal levels.
Many founders enjoy being able to use losses to benefit their own tax returns in the early years, but this stops after conversion.
Founders should work closely with tax advisors to understand the implications of this shift, particularly if the company has been running at a loss.
2. Changes to your income tax basis
When the LLC converts, the members’ ownership interests are converted into corporate stock.
Understanding how your tax basis in the LLC carries over to the new C corporation is critical, as it will impact future gains or losses when you eventually sell, gift, or transfer your shares.
3. C Corp double taxation
C corporations are subject to what’s known as double taxation — first on the corporation’s profits and again when dividends are distributed to shareholders.
While this is one of the drawbacks of the C corporation structure, proper tax planning and strategies can mitigate (or even eliminate) some of these effects.
In cases where the corporation has operating losses, those losses are no longer passed through to shareholders but are retained at the corporate level as Net Operating Losses (NOLs).
Case Study: AccountingTech Innovators Inc
To illustrate the conversion process, consider a hypothetical example inspired by one of our clients — AccountingTech Innovators Inc.
AccountingTech started as a single-member LLC, leveraging pass-through taxation to its advantage in the early stages. This structure allowed the sole owner to offset business losses against their spouse's tax liabilities, significantly easing their personal tax burden.
However, as the company scaled, this once-beneficial structure became a roadblock. They discovered that their LLC status deterred potential venture capital investors, who were wary of the tax complexities involved. It quickly became clear that transitioning to a C corporation was crucial for unlocking new growth opportunities and securing funding.
When AccountingTech decided to make the switch, they approached us for guidance. Our team facilitated a seamless conversion, prioritizing tax efficiency throughout the process. A key focus was maximizing the founders' eligibility for benefits under IRC Section 1202 (Qualified Small Business Stock). This strategy aligned perfectly with their long-term plans for an IPO, potentially allowing them to exclude up to $10 million in capital gains on the sale of stock—provided they met specific criteria.
This case underscores why it’s essential to work with experienced professionals during a conversion. Early missteps can lead to costly consequences, potentially costing founders millions in avoidable taxes. Partnering with the right team ensures you can focus on growth while safeguarding your financial future.
Is conversion to a corporation right for your startup?
Moving from an LLC to a C corporation is not a decision to be taken lightly — but it might be the right one for your startup. While the legal and tax implications are significant, the long-term benefits, such as attracting institutional investors and simplifying equity compensation, can be just what your company needs to grow.
If you're planning to scale or thinking about raising venture capital, don't wait until investors are knocking on your door. Start exploring this transition early. The more runway you give yourself, the more options you'll have to do it right and avoid expensive mistakes.
Got questions about what this means for your startup? Schedule a call with one of our Digits team members today, and we will walk you through your options.
Switch to Digits today
Experience accounting, reimagined.
