If you’re building a startup and operating as an LLC, at some point you might wonder: is it time to switch to a C-corp?
It’s a common question, especially when your business starts to scale, you think about raising venture capital, or you want to offer equity to your team. Let’s explore why startups become C-corps, how the process works, and key points for states like Delaware.
LLCs are flexible and great when you're just starting out. But for startups that are growing fast, raising funds, or hiring, a C-corp is often a better fit.
Here’s why:
Most VCs and institutional investors won’t fund an LLC. The reason? Taxes. In an LLC, profits “pass through” to the owners’ personal tax returns, even if no money was actually distributed. That creates tax headaches for investors. In a C-corp, taxes stay at the corporate level unless shareholders get dividends, which is more predictable and familiar to investors.
LLCs can’t issue stock. They can offer “interests,” which are complex and not well understood. On the other hand, C-corps can issue stock and stock options, which is exactly what most employees expect. If you’re planning to build a team and give them meaningful equity, you’ll need a C-corp structure to do it properly.
C-corps are easier to work with internationally. LLCs often confuse foreign governments and tax authorities. A C-corp provides a more standardized setup for doing business across borders.
Converting to a C-corp does have tradeoffs. Here are some things to keep in mind:
If you’re staying small and don’t need outside funding, you might not need to convert. But if you’re aiming for fast growth, attracting talent, or raising capital, the benefits usually outweigh the costs. A more detailed comparison of the two types of companies can be found in the article LLC vs. C-Corp – Which Is Right for Your Business?
The biggest tax shift is that LLCs are usually taxed once, and C-corps are taxed twice.
In a C-corp, your company pays tax on its profits. If you then pay out dividends to shareholders, they also pay tax on that income. That’s the so-called “double taxation.” But in exchange, C-corps may get access to certain deductions and tax planning tools that LLCs can’t use.
Some conversions can be done in a tax-neutral way (meaning no immediate tax bill) if structured correctly. There’s a specific IRS rule (Section 351) that lets you transfer your LLC’s assets and liabilities to the new C-corp without triggering a taxable event. But if the conversion isn’t done carefully, you could accidentally create a tax liability.
Also, your current tax status matters. If your LLC is taxed as a sole proprietorship, partnership, or even an S-corp, the conversion steps and consequences will differ. This is definitely an area where it’s worth working with a tax pro to avoid surprises.
Your state’s laws determine which method you can use, but generally there are three:
If your state allows it (Delaware does), you can file a Certificate of Conversion plus the new Certificate of Incorporation. That’s it. Your LLC becomes a C-corp. Your members become shareholders, and assets and liabilities stay with the company.
This is the cleanest, most streamlined option if it’s available in your state.
This is for states that don’t support direct conversion. You create a new C-corp, then legally merge your LLC into it. The LLC disappears, and its assets, liabilities, and members all move over. It works well, but involves a few more filings and steps.
If neither of the above is an option, you can do it manually. You set up a new C-corp, transfer all assets and liabilities one by one, and then shut down the LLC. This method is more paperwork-heavy and time-consuming, so it’s typically used only if needed.
If you’re already in Delaware (or planning to be) you’re in luck. Delaware allows direct statutory conversion, and the process is straightforward. You file two forms:
If your LLC is based in another state, you might need to either convert or merge into a Delaware C-corp and then wrap up your operations in the original state.
Switching from an LLC to a C-corp can be a smart move when your business is scaling up. It makes fundraising easier, gives you tools to reward employees, and sets you up for long-term growth.
That said, it’s a legal and tax-heavy process, so get the right help, especially when it comes to structure, timing, and compliance. And if you’re ready to take the leap, we’re happy to walk you through the process from start to finish.