Karla Dennis on Converting from LLC to C-corp: Tax Implications

Many people prefer starting their companies as LLCs because of their flexible structure and easy setup. However, many of those people feel the need to convert from an LLC to a C-corp later on. It is the right approach to start as an LLC and then convert to C-corp later on when you feel that the time is right. However, whenever you are planning such a conversion, you really need to make sure that it is in the best interests of your company. Karla Dennis, the founder, and CEO of Karla Dennis and Associates, Inc., has important suggestions for you in this regard.

Things to Keep in Mind When Converting from LLC to C-corp

Karla Dennis suggests that you should keep the following three things in mind while planning to convert from LLC to C-corp:

1. You need to realize that you will file a different tax form.
2. You need to know that you will no longer have a flow-through entity.
3. You will need to put yourself on payroll.

When to Convert from LLC to C-corp?

The most important thing to consider is whether converting from LLC to C-corp is in your best interests or not. For that, you need to know when is such a conversion a good idea. Here are five situations in which Karla believes converting from an LLC to a  C-corp might be a good idea:

1. When you are trying to raise capital or money for your business.
2. When you need to keep your individual income taxes low.
3. When income flowing from your LLC to your personal return is so high that the taxes you pay at the individual level is greater than the taxes as a C-corp.
4. When you want to show only W-2 income on your personal return and not a flow-through business.
5. If you have a five-year horizon and you are planning on selling your business.

Tax Changes for LLC vs. C-corp

Here are the main tax changes to be aware of:

1. You will need to go from a 1065 to an 1120 form.
2. You will no longer receive a K-1 form.
3. You will be paying taxes on the income earned at the C-corp level versus flowing through to yourself.

Scheduling an LLC to C-corp Conversion

Yes, you can schedule an LLC to C-corp conversion. However, Karla suggests that you need to plan it in Q4, so that you can convert out of one entity and into another without having to file multiple returns in the same year. Remember that IRS requires you to file a return 2 ½ months after the LLC is no longer in existence.

How Can Karla Dennis Help in This Regard?

If you are planning on converting from LLC to C-corp, Karla Dennis has some important insights for you. Karla Dennis is the owner of her own tax firm, Karla Dennis and Associates, Inc., and her insights are worth a million dollars. Her firm can help you with two things in this regard:

1. Figure out if converting from LLC to C-corp is in your business’s best interests.
2. Help you process the appropriate paperwork with taxing authorities.