Tax Reform FAQs: Should I convert from an LLC to a C Corp?
posted Sep 18, 2018 by Norman LeBlanc, CPA in the Global Tax Blog
Did you tune into our recent webinar? Don’t worry if you missed it—you can find it here- “The Impact of Tax Reform on Businesses and Individuals”. Today, we tackle a question from a viewer regarding how tax reform guidance will affect C corp conversions.
Question: Given recent guidance, would it be advantageous to convert from an LLC to a C corp?
Before we answer this, here’s a bit of background info.
When you start your own business, your first task is to decide which entity type (business structure) is best for you. There are a few different options, today we discuss LLCs and C corps.
What is an LLC?
An LLC or limited liability company is an entity structure in which members of the company are guarded from being personally liable for the company's debts and liabilities. The LLC business structure combines the pass-through taxation of a partnership with the limited liability of a corporation.
What is a C corp?
A C corporation is a corporate structure where the company profits are taxed separately from its owners. In other words, the corporation is legally viewed as an independent, separate entity. This means that the owners are shareholders and the corporation functions outside of their personal finances. A C corporation’s shareholders elect a board of directors and have officers that make business decisions and oversee policies.
Why would I want to convert?
Maybe you chose to first set up your business as an LLC because of its liability protection and flexible structure. Now, you might be rethinking this choice. Maybe you want to minimize self-employment taxes, or maybe you want to give employees a stake in the company but you don’t want to have a partnership. To meet either of these desires, you’ll want to consider converting. Converting a C corp into an LLC allows the C corporation shareholders to continue to have limited liability while obtaining the attributes of passthrough taxation.
Now...to answer our viewer’s question....
Given recent guidance, would it be advantageous to convert from an LLC to a C corp?
Well, it certainly would if....
- There’s are consistent large profits and
- You’re in a high tax bracket and
- The goal is to leave the cash in the business for growth and expansion.
However, be mindful of future dividends – even if you say today that you’d prefer to leave the cash in, five years from now you may have built a pool of cash and want to take it out. While you may be enjoying the new 21% corporate rate, you will be taxed at 15 or 20% on that dividend in the year it’s paid. This could eliminate the potential savings as the top personal rate is now 37% which is less than the combined 41% corporate and dividend tax.
Stay tuned for additional questions and answers from our recent webinar. Don’t forget to view it here “The Impact of Tax Reform on Businesses and Individuals”. Contact us today for any questions.
For more tax reform updates, be sure to visit our Tax Reform Center- your “one stop shop” for all things Tax Cuts and Jobs Act (TCJA) related.