Startup Law · LLC

When you convert a Delaware LLC to a C-corp, what exactly does it mean legally and tax-wise?

Kishore Swaminathan Creative thinker & doer.

June 27th, 2016

I am planning to convert my Delaware-based LLC into a C-corp as requested by investors. 

What happens legally when you do this conversion - does the same company change status from an LLC to a C-corp or is the LLC dissolved and sells all its assets to a new company? 

 If it's the latter, then are the founders selling their shares in the LLC and buying in the C-corp? If so, what happens to vesting schedules, 83(b) elections and so forth?

Thanks in advance. 

Gabriel Moncayo CEO & Co-founder at AlwaysHired | Top 25 AA-ISP Inside Sales Professional

June 27th, 2016

We just went through this. Everything just got transferred to the C-Corp. All IP from the founders as well as all assets from the LLC. We did a complete new business rather than a transfer. So the AlwaysHired LLC was shut down and the new AlwaysHired C-corp was started. This was partially due to co-founders from the LLC no longer being a part of our journey as we go through our next stage of growth. Hope this answer brought some value as our counsel guided us through the process. 

Annick Fuchs Startup lawyer in the Silicon Valley and Europe, ex Director Legal PayPal

June 27th, 2016

Legally you are incorporating the c-corp, transferring the assets to the c-corp and dissolving the LLC. you do it in one act in Delaware though. Through an application of transfer. It triggers tax consequences. But should in most cases be a non taxable event. Hope this helps.

Jessica Alter Entrepreneur & Advisor

June 27th, 2016

But you have a lawyer doing this for you right? This isn't something you want to do on the cheap and then have it be wrong. The lawyer should do it and know these answers. I'd go to upcounsel.com if you want it done quickly and not for an arm and a leg

Joseph J. Vecchiolla

June 27th, 2016

I believe Delaware has a conversion statute, Section 8-265 of the Delaware Code. There are some filing fees but the process is fairly straight forward, assuming the current shareholders agree to the conversion. As Annick suggests, counsel is advised, because this process typically precedes outside investment, so your situation may have a little complexity.

Jessica Alter Entrepreneur & Advisor

June 30th, 2016

For the record that's not what Upcounsel is (good to only comment if you've used it). I've used it and had great experience. It's a true marketplace for lawyers and you post your project they bid and you can hire someone. It's worked well for us on contracts, contests etc. LLC to c Corp is not complicated but you need someone whose done it before (which you can also see on Upcounsel ). 

Andrew Jiranek Managing Attorney at Jiranek & Company, P.A.

June 30th, 2016

To answer your questions, there are several areas to consider.  First, there are the tax consequences of the conversion.  Second, there are the state law requirements of the transaction.  These requirements will determine how you can legally structure the transaction to accomplish the conversion.  Third, you must consider the contractual, employment and other consequences of the conversion.  It will effect your legal arrangements with your business partners.  Fourth, you should consider the corporate and securities legal consequences of the transaction.  One of the responders to this question mentioned that a conversion was necessary because the founding members were no longer necessary for the next level of development in the business.  These founding members might not agree with being used for start-up and eliminated for growth.  I agree with some of the other responders, you need legal counsel.  I would not recommend upcounsel.com.  This appears to be a lawyer referral website that charges a fee, thus inflating the cost of the legal service and getting between you and your lawyer.  You don't need a middle man managing your legal services.  Investing in a direct relationship with an attorney is the best way.