IRS Form to Convert C Corp to LLC: Steps and Filing Requirements

Switching from a C Corporation to an LLC can have significant tax and legal implications. Businesses often make this change to simplify operations, reduce compliance burdens, or take advantage of more flexible tax treatment. The process involves dissolving the corporation, forming the new LLC, and ensuring proper IRS filings. Each step must be carefully executed to avoid penalties or unintended tax consequences.

Legal Documents Needed

Before converting a C Corporation into an LLC, several legal documents must be prepared to comply with state and federal regulations. Some states allow a statutory conversion, directly transforming the corporation into an LLC. Others require formal dissolution before forming the new entity. The plan of conversion or dissolution should specify how assets, liabilities, and ownership interests will be transferred.

Corporate bylaws and shareholder agreements must be reviewed. If the corporation has multiple shareholders, approval may be required through a shareholder resolution. Additionally, contracts, leases, or loan agreements should be examined for clauses that could be triggered by the structural change. Some agreements may require renegotiation or lender approval.

State filings are a key part of the process. If the corporation is registered in multiple states, withdrawal or dissolution documents may be needed in each jurisdiction. The new LLC must file Articles of Organization with the appropriate state agency. Some states also require a Certificate of Conversion to formally record the transition.

Entity Formation Steps

Once approvals and documentation are in place, the next step is establishing the LLC. This begins with selecting a name that complies with state naming requirements, typically including “Limited Liability Company” or an approved abbreviation. The name must also be distinguishable from existing businesses. A name availability search through the Secretary of State’s office can help prevent conflicts.

The LLC must designate a registered agent to receive legal documents on behalf of the business. The agent must have a physical address in the state where the LLC is being formed. Many businesses use a professional registered agent service for compliance and privacy.

The LLC’s operating agreement establishes governance, outlining ownership percentages, profit distribution, management responsibilities, and dispute resolution procedures. While not always required by law, a well-drafted agreement prevents conflicts and clarifies financial and operational decision-making.

Obtaining an Employer Identification Number (EIN) from the IRS is necessary for tax reporting and banking. Even if the corporation previously had an EIN, the transition requires a new one, as the IRS considers the LLC a separate entity. The application can be completed online through the IRS website.

IRS Form Submission Requirements

Transitioning from a C Corporation to an LLC requires careful attention to tax filings. The corporation’s dissolution triggers final reporting obligations. The IRS requires Form 966, Corporate Dissolution or Liquidation, within 30 days of the board’s resolution to dissolve. The corporation must also file its final Form 1120, U.S. Corporation Income Tax Return, marking it as a “final return.”

The transfer of assets from the corporation to the LLC can have tax consequences. If corporate assets are liquidated and distributed to shareholders before being contributed to the LLC, this may trigger capital gains tax at both the corporate and shareholder levels. The tax impact depends on the corporation’s basis in the assets and their fair market value at the time of transfer. Where possible, businesses should evaluate whether a statutory conversion allows for a more tax-efficient restructuring.

Employment taxes must also be addressed. If the corporation had employees, it must file final payroll tax returns, including Form 941, Employer’s Quarterly Federal Tax Return, and Form 940, Employer’s Annual Federal Unemployment Tax Return. Any outstanding payroll tax liabilities must be settled. The LLC, as a new entity, will need to establish its own payroll tax accounts and may need to refile Form 8850, Pre-Screening Notice and Certification Request for the Work Opportunity Credit, if it intends to claim employment-related tax credits.

Adjusting Tax Classification

Once the LLC is established, selecting the appropriate tax classification is an important financial decision. Unlike C Corporations, which are taxed as separate entities, LLCs offer flexibility in tax treatment. By default, a single-member LLC is classified as a disregarded entity, meaning its income is reported directly on the owner’s personal tax return using Schedule C of Form 1040. Multi-member LLCs are treated as partnerships and must file Form 1065, U.S. Return of Partnership Income, passing income and deductions through to members via Schedule K-1.

For businesses seeking to retain corporate tax treatment, an LLC can elect to be taxed as an S Corporation or a C Corporation by filing Form 2553 or Form 8832, respectively. The S Corporation election allows income to pass through to owners while avoiding self-employment tax on distributions, though reasonable salaries must still be paid to active members. If a C Corporation election is made, the LLC will remain subject to the flat 21% corporate tax rate, which may be beneficial for businesses reinvesting earnings rather than distributing profits.

Ongoing Filing Requirements

After converting from a C Corporation to an LLC, businesses must stay compliant with federal and state filing obligations. While LLCs generally have fewer formalities than corporations, they are still subject to periodic filings that vary by state and tax classification.

State requirements often include filing an annual report or biennial statement, updating the state on the LLC’s ownership, registered agent, and business activities. Some states impose an annual LLC franchise tax or minimum business tax, such as California’s $800 minimum franchise tax. If the LLC requires state or local business licenses, these must be renewed accordingly. Failure to meet these obligations can result in penalties, administrative dissolution, or loss of good standing, which may impact the company’s ability to enter contracts or access financing.

Federal tax obligations depend on the LLC’s elected tax classification. If taxed as a partnership or S Corporation, the business must file Form 1065 or Form 1120-S, respectively, and issue Schedule K-1s to members. If the LLC has employees, it must continue to withhold payroll taxes and file Forms 941 and 940. Additionally, LLCs engaged in interstate commerce or selling taxable goods must comply with sales tax collection and remittance rules, which have become more complex following the Supreme Court’s decision in South Dakota v. Wayfair, Inc. (2018). Businesses operating in multiple states should assess their nexus obligations to avoid noncompliance with state tax authorities.