Corporation to LLC: Delaware Conversion Guide 2024

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How to Convert Corporation to LLC in Delaware

The decision to convert a corporation to an LLC in Delaware can provide numerous benefits, including improved tax flexibility, simplified management, and reduced compliance burdens. If you’re considering this strategic move, our comprehensive guide will support you through the process of starting an LLC in Delaware, equipping you with the knowledge to successfully convert your corporation to an LLC in Delaware.

At LLCBase, we aim to make the transition as smooth as possible by providing a step-by-step guide that covers legal requirements, tax implications, and necessary paperwork. Let’s explore the exciting world of corporation-to-LLC conversions in the dynamic Delaware business landscape!

What are a Corporation and an LLC

A corporation is a type of business structure that is a separate legal entity from its owners, known as shareholders. This legal distinction provides shareholders with limited liability protection, meaning their personal assets are not at risk in the event of the corporation’s debts or legal issues. Corporations are subject to more stringent regulations and requirements than other business structures, such as keeping detailed records, holding annual meetings, and filing separate tax returns. Corporations can also issue shares of stock to raise capital and can exist perpetually beyond the life of their owners.

On the other hand, an LLC, or Limited Liability Company, combines a corporation’s limited liability protection with the operational flexibility of a partnership or sole proprietorship. In an LLC, the business owner, known as a member, has personal liability protection, meaning their personal assets are not at risk in case of the business’s debts or legal issues. LLCs also have flexible tax options, as they can be taxed as a pass-through entity (like a sole proprietorship or partnership) or a corporation. This type of business structure is more straightforward to set up and manage than a corporation and offers legal and tax benefits for the owner.

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9 Steps to Convert From Corporation to LLC

Converting your corporation to an LLC in Delaware is made simple with our 9-step process. By following these steps, you’ll receive expert guidance through each conversion stage, ensuring a smooth and efficient transition for your business.

We’ve also compiled a list of the best business attorneys in Delaware who can provide valuable legal services when converting from a Corporation to an LLC. Browse through their expertise for the perfect assistance!

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If you decide to do it yourself, just follow the following steps of converting a corporation to an LLC below:

Step 1: Research Delaware LLC Conversion Laws

Before starting the process, it’s essential to understand the specific laws and regulations governing LLC conversions in your state. To gather accurate information, visit your state’s Delaware Secretary of State website and other government resources, such as the Delaware Division of Revenue and Delaware Division of Corporations. These resources will provide the necessary guidelines, requirements, and forms for converting a corporation into an LLC in Delaware.

As you research, you must familiarize yourself with required fees, such as the $90, which may vary depending on the state. Additionally, take note of any relevant tax rates that may apply to your new LLC, including the 8.70% income tax and 0%; Delaware has no sales tax sales tax. Understanding these tax rates will help you make informed decisions about your business structure and ensure that your conversion to an LLC in Delaware complies with all state-specific tax laws.

In some cases, additional requirements or regulations may apply to specific industries or business activities. Be sure to research industry-specific regulations and consult an attorney if you have questions about your situation.

Overall, thorough research is critical for successfully converting your corporation to an LLC in Delaware. By understanding the state-specific laws and requirements, you’ll be better prepared to navigate the conversion process and make the transition as seamless as possible.

Step 2: Determine the Type of Conversion

In some states, you can convert a corporation to an LLC using either statutory conversion or statutory merger. These two methods have distinct processes and requirements, so it’s crucial to research their differences and choose the best fit for your situation.

A statutory conversion is a more straightforward process wherein a corporation directly converts into an LLC. This method typically involves filing Articles of Conversion with the Delaware Secretary of State and paying the associated state incorporation fee. 

On the other hand, a statutory merger involves merging the existing corporation with a newly formed LLC, effectively transferring the corporation’s assets and liabilities to the LLC. This process may require additional documentation, such as a Plan of Merger or Articles of Merger, and might be subject to a separate fee.

Factors to consider when choosing between these two methods include the complexity of the process and if the three ways, online, by mail and fax is available in your state. Additionally, take note of the associated incorporation fee of$89 for filing online, fax and by mail, as this may impact your decision.

If you need more clarification or are trying to decide which conversion method is best for your situation, consult a business attorney. They can help you navigate the complexities of the process and ensure that you comply with all state-specific laws and regulations for converting a corporation to an LLC in Delaware.

Step 3: Hold a Shareholder Meeting

Notifying all corporation shareholders about your plans to convert to an LLC in Delaware is crucial in the conversion process. To do this, schedule a shareholder meeting to discuss the conversion, its benefits, and potential challenges. Ensure that you provide adequate notice to all shareholders as required by your corporation’s bylaws or state regulations.

During the meeting, present your case for converting the corporation to an LLC, addressing any concerns or questions from shareholders. Depending on your corporation’s bylaws and Delaware regulations, you may need to obtain approval from a specific percentage of shareholders (voting threshold) to proceed with the conversion.

It’s essential to document the meeting minutes accurately, including the details of discussions, any voting results, and the resolutions approving the conversion. These records may be required when filing the Certificate of Good Standing and any necessary Certificate of Amendment documents with the Delaware Secretary of State. Proper documentation can also help protect the company and its shareholders in case of any future disputes or legal issues related to the conversion.

Step 4: File the Necessary Documents

Once you have determined the type of conversion and obtained shareholder approval, the next step is to file the required documents with the Delaware Secretary of State. Depending on the conversion method you’ve chosen, the forms you need to submit may vary:

  1. Statutory Conversion: If using this method, file the Articles of Conversion, which provide details about your corporation and the new LLC, including the name, principal address, and Registered Agent information. 
  2. Statutory Merger: In this case, you’ll need to submit a Certificate of Merger or similar document outlining the merging entities, the surviving LLC’s name and structure, and the terms and conditions of the merger.

Be sure to include all necessary information in these documents and double-check for accuracy to avoid any delays or issues during the filing process. When submitting your paperwork, pay the required fees, such as the $90.

In addition to the conversion documents, ensure you meet the state name reservation period of 120 days requirements for reserving your new LLC’s name. Depending on your state’s regulations, you may need to pay the Not available or $75 to reserve your desired name. Remember that some states may have specific naming conventions or restrictions for LLCs that you need to follow.

Step 5: Create an LLC Operating Agreement

Draft an operating agreement for your new Delaware LLC. This document outlines your LLC’s management structure, ownership, and operational rules. While not always legally required, having a well-drafted operating agreement is crucial for protecting your business, establishing clear guidelines, and avoiding future disputes among members.

When creating your LLC operating agreement, be sure to address the following items specific to your Delaware:

  • Annual report requirements: Detail the frequency and deadlines for filing an annual report in Delaware, if applicable. In Delaware, the annual report must be filed every 1 year. Clarify the information required for these reports and assign responsibility for their timely submission.
  • Annual fee obligations: Specify the $0 because it is not mandatory that your LLC must pay to maintain its good standing in Delaware. Outline the payment process, including relevant deadlines and the party responsible for payment.
  • Franchise tax: Your Delaware LLC is subject to an annual franchise tax of $175 minimum, including information about the tax rate, calculation method, filing deadlines, and payment procedures. Make it clear which member or manager is responsible for managing and submitting the franchise tax payments.
  • Franchise tax penalty: If your LLC fails to submit the annual franchise tax on time, outline the potential late filing fees and penalties that may apply. In Delaware, the penalty for late filing of franchise tax is $200 + 1.5% interest per month.  Specify the procedure for addressing late payments and resolving any issues with the Delaware tax office.

Addressing these critical aspects in your operating agreement ensures that your Delaware LLC remains compliant with all state regulations and requirements, minimizing the risk of penalties or disputes among members.

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Step 6: Obtain New EIN

Apply for a new EIN from the IRS for your Delaware LLC. This unique nine-digit number is assigned to your business for tax, reporting purposes, and other essential functions. You can apply for an EIN online through the IRS website, which is often the fastest and most convenient method. Alternatively, you may apply via mail or fax by submitting Form SS-4, depending on your preference and the urgency of your application.

Once you have obtained your new EIN, updating all relevant tax and business documents with your new number is crucial. This includes updating the no form filed with the Delaware Division of Revenue to ensure accurate reporting and compliance with Delaware tax regulations. Additionally, update any other federal, state, and local tax forms or registrations that require your EIN, such as payroll tax filings, sales tax permits, and any required business licenses or permits.

Inform your bank, financial institutions, and other relevant parties of your new EIN to ensure all accounts, loans, and financial transactions are associated with your Delaware LLC’s correct tax identification number.

By obtaining a new EIN and updating all relevant documents and accounts, you can ensure a smooth transition of your business operations under your new Delaware LLC structure, maintaining compliance with all tax and reporting requirements.

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Step 7: Update Licenses and Permits

Notify all relevant federal, state, and local agencies of your business’s conversion to an LLC in Delaware. This includes but is not limited to, the Delaware Secretary of State, the  Delaware Department of Labor, the Delaware Division of Corporations, the Delaware Division of Revenue, and any other regulatory bodies overseeing your industry or business activities. Informing these agencies of your new LLC structure ensures that your business remains compliant with all applicable regulations and maintains accurate records.

Update any Delaware licenses, permits, or registrations your business holds to reflect your new Delaware LLC structure and ownership. This may involve applying for new licenses or permits, transferring existing ones, or amending the information on file with the issuing agencies. Review the specific requirements and procedures for each license or permit, as these may vary between federal, state, and local levels.

In addition to updating your licenses and permits, you may need to update your information with the Delaware Secretary of State. This could include filing an amendment to your Certificate of Formation  or notifying the Delaware Secretary of State of changes to your Registered Agent or business address. Consult the Delaware Secretary of State website or contact their office for guidance on updating your business’s information following the conversion to an LLC.

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Step 8: Inform Creditors and Other Stakeholders

Notify all creditors, suppliers, customers, and other stakeholders of your corporation’s conversion to an Delaware LLC. This ensures they know the change and can update their records, contracts, and invoices accordingly. Be transparent and proactive in communicating this information to maintain trust and minimize potential disruptions to your business relationships.

Be prepared to provide these parties with any necessary documentation related to the conversion, such as your new EIN, updated operating agreement, or new licenses and permits. Providing this information on time can help facilitate a smooth transition and keep your business operations running smoothly.

Step 9: Close the Corporation

After completing the conversion process and successfully establishing your new Delaware LLC, you may be required to dissolve the corporation formally. Dissolving the corporation ensures that it is no longer considered a separate legal entity and releases you from any ongoing compliance obligations related to the corporation.

Follow your state’s guidelines for dissolving a corporation in Delaware, which can typically be found on the Delaware Secretary of State website or by contacting their office. The process may involve submitting a Certificate of Dissolution or similar document and any required fees.

As part of the dissolution process, you may need to file a final tax return for the corporation, settle any outstanding debts or liabilities, and distribute the remaining assets to shareholders by your corporation’s bylaws or state law. Consult with legal and financial advisors to ensure you complete all necessary steps to dissolve the corporation properly and comply with your state’s regulations.

By diligently informing all stakeholders of your corporation’s conversion to an Delaware LLC and formally dissolving the corporation, you can ensure a seamless transition and protect your business interests as you move forward under the new LLC structure.

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Why Change from Corporation to LLC in Delaware

While both entities offer limited liability protection to their owners, there are several reasons why converting to an LLC may be beneficial. Let’s explore why business owners may change from a corporation to an LLC in Delaware.

  • Tax Flexibility: One of the most significant advantages of an LLC over a corporation is its tax flexibility. By default, LLCs are considered pass-through entities for tax purposes, meaning that the company’s profits and losses are passed through to its members, who report them on their personal income tax returns. This avoids the double taxation faced by corporations, where profits are taxed at the corporate level and again at the individual level when dividends are distributed to shareholders. By converting to an LLC in Delaware, business owners can take advantage of pass-through taxation, potentially resulting in significant tax savings. Also, LLCs can be taxed as a corporation if it becomes more advantageous.
  • Simplified Management Structure: LLCs offer a more flexible and straightforward management structure than corporations. While corporations require a board of directors to oversee the company’s operations and make major decisions, LLCs can be managed directly by their members (member-managed) or appoint managers to oversee business operations (manager-managed). By converting to an LLC in Delaware, business owners can streamline their company’s management structure and reduce the administrative burden associated with maintaining a board of directors, holding shareholder meetings, and keeping minutes of all corporate meetings.
  • Fewer Compliance Requirements: LLCs typically have fewer compliance requirements than corporations, making them easier to maintain and manage. For example, LLCs can hold annual meetings, maintain a board of directors, or adhere to corporations’ formalities. By converting to an LLC in Delaware, business owners can reduce the time and resources spent on meeting various compliance requirements, allowing them to focus more on their core business operations.
  • Increased Asset Protection: LLCs may offer additional asset protection benefits in some states than corporations. For example, some states provide charging order protection for LLCs, which limits a creditor’s ability to seize a member’s ownership interest in the LLC. This can be particularly important for business owners concerned about protecting their personal assets from potential business liabilities. By converting to an LLC in Delaware, business owners may be able to take advantage of these additional asset protection benefits, depending on the specific regulations in Delaware.
  • Customizable Operating Agreement: LLCs can create a customized operating agreement that outlines the company’s management structure, ownership, and operational rules. This allows business owners to tailor the agreement to suit their specific needs and preferences instead of the more rigid bylaws required by corporations. By converting to an LLC in Delaware, business owners can create an operating agreement that better aligns with their business goals and desired management structure.

FAQs

What is the first step to converting a corporation to an LLC in Delaware?
Renew or obtain a Delaware LLC certificate of formation.
What is a Delaware LLC certificate of formation?
It is a document that serves as evidence that your LLC exists.
Can a Delaware corporation convert to an LLC in any other state?
Yes, if the state allows foreign LLCs to operate.
Do I need to obtain a new EIN if I convert a corporation to an LLC in Delaware?
No, you can keep using the existing EIN.
I have a Delaware corporation with multiple owners; can I convert to an LLC with the same ownership structure?
Yes, an LLC can have the same ownership structure as a corporation.
What if my Delaware corporation has liabilities?
You must follow the appropriate legal procedures to resolve any outstanding debts and liabilities before converting to an LLC.
Can I convert a Delaware corporation to an LLC without dissolving the corporation?
Yes, the corporation can trigger a merger or a conversion into the LLC.
How long does it take to convert a Delaware corporation to an LLC?
The process can take anywhere from a few days to a few weeks.
Do I need to file articles of organization for my Delaware LLC?
Yes, you must file the Articles of Organization with the Delaware Division of Corporations.
Are the state filing fees different if I convert a corporation to an LLC in Delaware?
Yes, depending on the type of corporation and the membership structure of the emerging LLC.
Do I need to alert my creditors before I convert my Delaware corporation to an LLC?
It’s not strictly necessary, but best practice is to notify creditors of the changes.
What happens to my existing contracts if I convert my Delaware corporation to an LLC?
You will need to alter contracts reflecting the change of entity type.
Do I need to pick a company name before converting my Delaware corporation to an LLC?
Yes, you must choose a new LLC name and ensure it’s available before filing your conversion paperwork.
How do I resign as a Delaware corporation officer after converting to an LLC?
Follow usual officer resignation procedures following typical business governance best practices.
Is there a waiting period to convert a Delaware corporation to an LLC?
No, there is not typically a waiting period.
Are there stockholder or shareholder tax consequences associated with becoming an LLC?
Ask your tax professional, but you’ll want to be structured as an S Corporation or LLC to ensure minimal tax consequences.
Can I keep my existing logos, ads, and branding after a Delaware corporation converts to an LLC?
You must consult a lawyer to confirm if your logo, ads and branding qualify as intellectual properties and their rights transfer during the conversion.
As a small business owner in Delaware, can I convert my corporation to an LLC without an attorney?
It’s an excellent idea to use a corporate attorney to proceed with more complicated structural changes, but flings on your own at your own discretion. Each business situation is different.
Do I need to notify my Delaware employees if I convert the corporation to an LLC?
Yes, you should inform them of any organizational changes.
What if my corporation has franchise tax dues, debts, or liabilities before converting to an LLC?
Resolve all operational obligations before conversion to avoid complications in the process. Our recommendation is to utilize a corporate attorney to help with large accounting complexities.
What happens to shares of stock if I convert my Delaware corporation to an LLC?
Typically, the shares owned transfer to the newly formed LLC.
Does the ownershi[ structure of the corporation change when converting to an LLC?
It might depend on the State laws of Delaware regarding ownership transfer.
Can a Delaware LLC have fewer or more owners than the corresponding corporate structure?
Yes, LLCs may change their membership structures after converting to legal documents files with the Secretary of State of Delaware.
Do any corporate health benefit programs or insurance packages transfer to the LLC entity after conversion?
Contact each insurance provider to ask for contractual details and transfer procedures.
Do I need to have a Delaware registered agent to convert a corporation into an LLC?
You must have a registered agent recorded on your incorporation record or business address locations in the process.
Is there a particular type of business most suited to convert from a corporation into an LLC in Delaware?
Ask a financial specialist who understands your business needs regarding which entity type is to your advantage financially.
What do bank advisory managers do during the entity-conversion process?
Bank managers review and ensure regulatory compliance changes for the new convert structure, and your bank is notified of that accordingly.
Do capital does transtellar or investment agreements continue with LLC entity forming businesses?
Memberships, partnerships, stock, assets owned, all of these values and ownerships transfer per-negotiated settlements clause in constitutional laws. Any other restrictions that you should disclose during planning incorporation must adhere as your ownership group decides.
Can any corporation convert to an LLC in Delaware?
No, only certain types of corporations are eligible to convert to an LLC in Delaware.
What types of corporations are eligible to convert to an LLC in Delaware?
Delaware corporations, out-of-state corporations, and foreign corporations registered with the Delaware Secretary of State may be eligible to convert to an LLC in Delaware.
What does a Delaware corporation need to do before converting to an LLC?
The corporation needs to obtain consent from its shareholders or board of directors prior to filing any forms with the Delaware Secretary of State.
How does a corporation obtain consent from its shareholders or board of directors?
The corporation must follow the procedures outlined in its bylaws or articles of incorporation for obtaining consent.
Does the corporation need to obtain the consent of every shareholder or director?
No, but they need to follow the proper procedures as stated in the bylaws or articles of incorporation.
What paperwork is required to convert a corporation to an LLC in Delaware?
A Certificate of Conversion needs to be filed with the Delaware Secretary of State.
Where can the Certificate of Conversion be obtained?
The form can be found on the Delaware Secretary of State’s website.
What information is needed to complete the Certificate of Conversion?
The form requires information about the corporation and its new LLC structure, including the name and address of the new LLC.
Is there a fee to file the Certificate of Conversion?
Yes, there is a filing fee that must be paid at the time of submission.
When should the corporation file the Certificate of Conversion?
The certificate should be filed with the Delaware Secretary of State after the shareholders or board of directors have given consent.
Can shareholders block a corporation from converting to an LLC?
Yes, if a shareholder properly objects to the conversion, the conversion cannot occur.
Does the IRS consider the conversion of a corporation to an LLC a taxable event?
No, the IRS does not recognize the conversion as a taxable event.
What happens to the corporation’s tax identification number (EIN) after the conversion?
The corporation must obtain a new EIN after converting to an LLC.
What happens to the corporation’s debts and obligations after the conversion?
The LLC assumes all of the corporation’s debts and obligations after the conversion.
What happens to the corporation’s assets during the conversion?
The LLC generally assumes all of the corporation’s assets during the conversion.
Can a corporation convert to an LLC and maintain the same management structure?
Yes, but the LLC’s operating agreement must specify the management structure.
Must the Delaware Secretary of State approve the conversion?
Yes, the Secretary of State’s office reviews and approves the Certificate of Conversion.
How long does the conversion process take?
The process can take several weeks, depending on the efficiency of the Secretary of State’s office.
Can a corporation convert to any type of LLC in Delaware?
No, the corporation must convert to an LLC that is allowed under Delaware law.
What are the tax implications of converting a corporation to an LLC in Delaware?
There may be tax implications at the federal, state, and local levels, so consult with an experienced tax professional.
Can a corporation convert to an LLC without dissolving the corporation entirely?
Yes, the corporation can be converted to an LLC without dissolving.
Is it necessary to have legal counsel when converting a corporation to an LLC in Delaware?
While it’s not required, it’s a good idea to retain legal counsel to ensure compliance with relevant Delaware laws.
Is there a deadline for completing the conversion process?
No, there is no specific deadline, but it’s best to complete the process in a timely fashion.
Are there any consequences for failing to follow the proper conversion procedures in Delaware?
Yes, the LLC and its members may be exposed to liability or monetary penalties for failing to comply with Delaware law.
Must a corporation seeking to convert to an LLC have been incorporated in Delaware?
No, a corporation can be incorporated in another state or country and still convert to an LLC in Delaware.
What happens to the corporation’s shareholders and their ownership interests after the conversion?
The LLC issues new ownership interests to its members, replacing the corporation’s outstanding shares.
Can a corporation convert to an LLC and then later convert back to a corporation?
Yes, it is possible to convert back to a corporation, but it requires complying with relevant Delaware laws.

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Conclusion

Converting a corporation to an LLC in Delaware can offer numerous advantages, including tax flexibility, simplified management, and reduced compliance requirements. By following the steps outlined in this article, you can successfully navigate the conversion process and unlock the full potential of your new Delaware LLC. To learn more about LLC formation, compliance, and other essential business topics, visit LLCBase and explore our resources to help you build a thriving and compliant business. Don’t miss out on the benefits of an Delaware LLC – take the first step in your business transformation journey today!

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