Changing your business entity
Even if you select the optimal structure when you start your business, a different entity type may become desirable as your company grows and changes. If you decide to go public, for example, you may need to convert your limited liability company (LLC) or S corporation to a C corporation.
It’s relatively easy, from a technical standpoint, to convert one type of entity into another, provided you meet the eligibility requirements (such as the 100-shareholder limit for S corporations). Keep in mind that certain conversions may have tax implications.
For instance, converting an LLC into a C corporation or S corporation is generally a tax-free transaction. The reverse can have a different outcome: Converting a corporation into an LLC may generate a tax liability, because the conversion is treated as a deemed liquidation of the corporation.
Meanwhile, converting a C corporation into an S corporation is fairly simple. Depending on your circumstances, however, the conversion may generate tax because of the built-in gains tax. This is a separate corporate-level tax levied on certain dispositions held by an S corporation on the conversion date; it’s applicable for the 10-year period following the entity change.
Certain conversions may have other tax implications or requirements, such as compliance with state laws, so it’s critical to plan carefully and consult your tax and legal advisors before making any changes.
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