Converting a Florida LLC to a Corporation: What to Know and How to Do It

Converting a Florida LLC to a Corporation: What to Know and How to Do It

Your business, like anything else, will have to change as it grows. This is why so many of our clients come to us asking about converting a Florida LLC. Let’s say that you started out as a Limited Liability Company (LLC). But things have changed and now you’re thinking about changing over to a corporation. Maybe you want to start allowing your employees to become shareholders in the company or simply want to explore how incorporating could help you pay less in taxes. The most important thing to remember is that while LLCs and Corporations are both covered by the same personal liability protection, they diverge when it comes to taxation, ownership, and management. Here’s what you need to know.

LLC vs. Corporation: Taxation and Ownership

Taxation: There are multiple taxation options available to LLCs. By default, they are taxed as either sole proprietorships or general partnerships depending on the number of owners. But an LLC can also elect to be taxed as either a C-Corporation or an S-Corporation.

Corporate taxation, on the other hand, has far less flexibility, as they can only decide between C-Corporation or S-Corporation status. C-Corporate status means that the business’s profits are subject to corporate taxation and that their shareholders will have to pay personal taxes on any received dividends. By contrast, S-Corporations don’t have to pay corporate taxes. Instead, all their profits pass through to the personal tax returns of their shareholders, which in most cases means lower taxes.

Ownership: Much like taxation, LLCs have more freedom of choice when it comes to ownership and management compared to Corporations. There are no default rules for how to own or manage an LLC. They also have more lenient requirements for record-keeping and reporting, all of which come together to make the LLC an attractive prospect for entrepreneurs looking to start a new business.

The corporate ownership and management structure is standardized and has been in place for some time now. The business issues shares of the company to their owners (shareholders). Shareholders are entitled to company dividends proportionate to their company ownership. These shares are easy to transfer from one individual to another, making it more attractive to potential investors.

If Corporations Are Less Flexible, Then Why do LLCs Keep Converting over to Them?

While they may lack the freedom of choice that LLCs have, corporations have their own advantages.

They Attract Investors: A corporation will be far more beneficial to business owners hoping to draw in investors, venture capitalists, or those who want to offer public stock offerings either now or further on down the line.

 Stock Compensation: If you’re looking to start up your first business but find yourself strapped for cash, offering stock as compensation for those who help you get the business going can go a long way.

They Can Lower the Owner’s Self-Employment Taxes: Unlike LLC owners who must pay self-employment Social Security and Medicare taxes based on the entirety of the company’s profits, the owners of S-Corporations have slightly different guidelines that can ease their tax burdens. In this situation, the owners of an S-Corporation who also run the business are paid and counted as employees. This means that their Social Security and Medicare taxes are based on their individual salary, not the company’s total profits. Learn more here.

The Conversion Process Simplified

A word to the wise: no matter how certain you are that you know what’s best for you and your company, you will still want to speak with an attorney experienced in Florida business law to ensure that you’re getting the deal that will work best for you.

For C-Corporation Status: Florida and several other states allow for a “statutory conversion,” which is a way to transfer your LLC’s assets and liabilities over to the desired corporation without having to go through the trouble of forming a new corporation and then dissolving the old LLC. This simplified procedure still requires a certificate of conversion along with a $25.00 filing fee. Certified Copies of the document and Certificates of Status can also be ordered for an extra $30.00.

Alternatively, you and your LLC’s members can perform a statutory merger by forming a corporation as shareholders. All members must be in agreement for this merger to be official. The next step is to exchange membership interests for corporate shares. Finally, you need to file a certificate of merger and any other required documents with the State of Florida. In some cases, you may need to formally dissolve your LLC as well.

For S-Corporation Status: In order to take advantage of the pass-through taxation available to S-Corporations, you will need to follow the above steps in addition to filing form 2553 with the Internal Revenue Service (IRS).

Converting a Florida LLC or other business entity is a complicated matter even for the savviest of entrepreneurs. Be sure to review your plans with a trusted Florida business lawyer.

Looking to start a business or grow your current business? Contact FL Patel Law today by visiting our website or calling (727) 279-5037.