How to Convert Delaware Corporation to LLC | The Ultimate Guide

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Convert Delaware Corporation to LLC

When it comes to business structures, corporations and limited liability companies (LLCs) are two of the most popular options in Delaware. Each business structure has advantages and disadvantages, so business owners must choose the best fit for their needs. There may come a time when a corporation realizes that converting to an LLC would be more beneficial. This comprehensive guide will walk you through Converting Delaware Corporation to an LLC, discussing the reasons for conversion, the steps involved, and any potential challenges you may face.

Webinarcare Editorial Team will help you easily understand the conversion process, so you must be guided by all the factors gathered in this article.

How to Convert Delaware Corporation to an LLC

Understanding Corporation and LLC in Delaware

Understanding the differences between corporations and LLCs in Delaware is essential for aspiring business owners and entrepreneurs. Both business structures offer distinct advantages and disadvantages, and comprehending their characteristics is crucial in making informed decisions.

Corporation

A corporation is a legal entity separate from its owners, known as shareholders or stockholders. It provides limited liability protection to its owners, meaning shareholders’ personal assets are typically shielded from company debts or liabilities. Corporations in Delaware have the advantage of being able to issue stock to raise capital, making them an attractive choice for businesses seeking significant investment opportunities. However, corporations also come with additional formalities, such as regular shareholder meetings and extensive record-keeping requirements.

Limited Liability Company (LLC)

A limited liability company (LLC) is a flexible business structure that combines the advantages of both corporations and partnerships. LLCs offer limited liability protection to their owners, called members, shielding their personal assets from business debts or lawsuits. Unlike corporations, LLCs do not require as many formalities as regular meetings or extensive record-keeping. This aspect makes LLCs more suitable for small businesses or entrepreneurs who prefer a less burdensome administrative and compliance structure.

Understanding the distinctions between corporations and LLCs is crucial to determine which structure aligns best with your business goals, resources, and needs in Delaware. By evaluating liability protection, taxation, ownership structure, and operational flexibility, entrepreneurs can make confident decisions when establishing their business entity in Delaware.

It is suggested that you speak with a legal professional before you begin converting your Delaware corporation to an LLC. They’ll understand what’s best for you and your company. To safeguard your personal assets from business debts, you can always start an LLC in Delaware.

– WEBINARCARE EDITORIAL TEAM

How to Convert Delaware Corporation to an LLC

Converting a corporation to an LLC in Delaware involves several steps, which may vary depending on Delaware laws and regulations. Here is an outline of the steps required to convert Delaware corporation to an LLC:

Step 1: Research and Understand the Conversion Process

Before embarking on the conversion process, it’s crucial to research and understands the specific requirements and steps involved in converting a corporation to an LLC in Delaware. Familiarizing yourself with the relevant state laws, regulations, and necessary forms or filings will help ensure a smooth transition. 

The Delaware Secretary of State will often have valuable information about the conversion process, including required forms, fees, and filing procedures. Look for sections related to business entity conversions and corporation dissolution. In converting to an LLC, hiring an LLC Service in Delaware is best since it provides guidance and assistance.

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Step 2: Obtain Shareholder Approval

The second step in converting Delaware corporation to an LLC is obtaining approval from the corporation’s shareholders. This typically involves holding a shareholder meeting and voting on a resolution to approve the conversion. Be sure to review the corporation’s bylaws to ensure that the proper procedures are followed.

Step 3: Prepare and File a Plan of Conversion

Delaware requires that a Plan of Conversion be prepared and filed with the Delaware Secretary of State. This document outlines the terms and conditions of the conversion, including the name and structure of the new LLC, the conversion’s effective date, and any other relevant information. 

In terms of naming your Delaware LLC, you must adhere to the following when choosing your LLC’s name:

  • The name must include “Limited Liability Company,” “LLC,” or “L.L.C.“
  • The name cannot include words or phrases that imply the company is engaged in activities it is not authorized to conduct.
  • The name must be distinct from other registered businesses in Delaware.

In Delaware, if you do not wish to file your LLC right away but want to hold the name that you have decided on, then you can reserve your LLC name for 120 days. You must file a name reservation application with the Delaware Secretary of State to keep the name. 

You can register your business under a different legal name if your preferred name isn’t available. Once you have chosen a name, you can submit an application for Delaware DBA (doing business as). In this manner, you can choose any name you desire for your business. A DBA allows a company to operate under the name of the person or entity who owns it. If you have decided to file for a DBA, you can file it in two methods, by mail and in person.

However, before filing a DBA, you should know that you need to renew your DBA every Indefinite, which costs $25.

Be sure to review Delaware’s specific requirements for a Plan of Conversion, Or you can hire the Best Delaware Registered Agent Services for easier processing. 

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Step 4: File Certificate of Formation for the New Delaware LLC

Along with the Plan of Conversion, you must file the Certificate of Formation in Delaware for your new LLC. This document establishes the new LLC that includes information such as the LLC’s name, Registered Agent, and management structure. 

For your LLC name, you must check the availability of your desired LLC name by searching the Delaware Division of Corporations Entity Search‘s website.

Regarding your Registered Agent, he must receive and forward legal and tax documents on behalf of your LLC, such as service of process, state tax notification, and filing Annual Report. Your Registered Agent must have a physical address in Delaware and be available during regular business hours. The cost of Registered Agent in Delaware ranges from $50 – $300.

With all of the information included in the Certificate of Formation, you must pay the filing fee of $90, which you can pay with the Delaware Secretary of State.

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Step 5: Prepare the Operating Agreement

While not always required by state law, it’s a good idea to draft an operating agreement for the new Delaware LLC. This document outlines the LLC members’ roles, responsibilities, ownership percentages, and other important operational details.

The operating agreement should include the following:

  • The roles and responsibilities of members and managers
  • The process for admitting or removing members
  • The allocation of profits and losses among members
  • The procedure for making major decisions
  • The process for dissolving the LLC

Step 6: Notify Creditors and Other Interested Parties

Inform creditors, vendors, and other interested parties of the Delaware corporation’s conversion to an LLC. This can help ensure a smooth transition and maintain good relationships with those involved in your business.

Step 7: Update Tax Information

After converting to an LLC, you must update your tax information with the Internal Revenue Service (IRS) and the Delaware Division of Revenue. This includes obtaining a new Employer Identification Number (EIN) for the LLC and updating any tax accounts or registrations.

To obtain an EIN for your Delaware LLC, you can apply online on the IRS website, by mail, or by fax. The online application process is the fastest and most convenient method, as you will receive your EIN immediately upon completing the application. There is no fee to obtain an EIN.

The application of an EIN in Delaware can be through the following:

  • Apply Online- The online EIN application is the preferred method for customers to apply for and obtain an EIN.
  • Apply by Fax- Taxpayers can fax the completed Form SS-4 application to the appropriate fax number), after ensuring that the Form SS-4 contains all of the required information.
  • Apply by Mail- The EIN application Form SS-4 can be filed via mail. The processing time frame to receive the mail is four weeks.
  • Apply by Telephone-International Applicants – International applicants may call 267-941-1099 (not a toll-free number) from 6 a.m. to 11 p.m. (Eastern Time) Monday through Friday to obtain their EIN.

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As an LLC in Delaware, your business may be subject to various state taxes and licenses, depending on the nature of your operations. Common taxes and licenses include:

  • Sales Tax: If your LLC sells taxable goods or services, register for Delaware sales tax permit and collect sales tax from your customers.
  • Employer Taxes: If your LLC has employees, you may be required to register for Delaware unemployment insurance and workers’ compensation coverage.

To ensure you comply with all applicable Delaware tax and licensing requirements, you can check out the Delaware Division of Revenue and Delaware Small Business Taxes for more information.

Step 8: Update Licenses and Permits

Depending on the nature of your Delaware business, you may need to update or obtain new licenses and permits for your LLC. Check with the appropriate local, state, and federal agencies to ensure your LLC complies with all necessary regulations.

Reasons for Converting Delaware Corporation to an LLC

When considering the conversion of a corporation to a limited liability company (LLC) in Delaware, it is essential to understand the potential advantages that this change in business structure may provide. Here are some common reasons for converting Delaware corporation to an LLC:

  • Tax Flexibility: One of the primary reasons Delaware business owners opt to convert their corporation to an LLC is the tax benefits. While corporations are subject to double taxation, where the company’s income and the shareholder’s dividends are taxed, LLCs are considered pass-through entities. This means the business’s income passes through to the owners’ personal tax returns, avoiding double taxation.
  • Simplified Management Structure: Another advantage of an LLC over a corporation is its simplified management structure. Delaware Corporations have a more complex structure with shareholders, One directors, and officers, while an LLC is managed by its members or designated managers. This can make decision-making and operations more straightforward for small businesses.
  • Reduced Administrative Requirements: Delaware LLCs generally have fewer administrative requirements than corporations, such as lower Annual Report fees and less stringent record-keeping rules. This can save Delaware business owners time and money, allowing them to focus more on growing their businesses.
  • Personal Asset Protection: Both corporations and LLCs offer limited liability protection, meaning the business’s debts and liabilities are separate from the owner’s personal assets. However, some business owners may prefer an LLC’s specific liability protections over a corporation.

Challenges and Considerations

When converting a corporation to an LLC in Delaware, it is essential to consider the potential challenges and implications of the conversion process. Here are some challenges and considerations to keep in mind:

  • Tax Implications: Although converting Delaware corporation to an LLC can offer tax benefits, it’s essential to consider the potential tax implications of the conversion. In some cases, the IRS may treat the conversion as a taxable event, which could result in additional taxes being owed. Consult with a tax professional to understand the tax implications of converting your corporation to an LLC in Delaware.
  • Legal and Financial Advice: Converting Delaware corporation to an LLC can be a complex process, and it’s essential to seek legal and financial advice to ensure that the conversion is done correctly in the business’s best interests.
  • Timing: Converting Delaware corporation to an LLC can take time, particularly if there are regulatory approvals or other requirements to be met. Be prepared for the conversion process to take several weeks or even months to complete.

Benefits of Converting Delaware Corporation to an LLC

Converting a corporation to a limited liability company (LLC) can benefit business owners. These advantages can include:

  • Tax Flexibility: One of the primary benefits of converting Delaware corporation to an LLC is the potential tax advantages. While corporations are subject to double taxation (the company’s income and the shareholder’s dividends are taxed), LLCs are generally considered pass-through entities for tax purposes. This means the business income passes through to the owners’ personal tax returns, avoiding double taxation.
  • Personal Asset Protection: Both corporations and LLCs offer limited liability protection, meaning the business’s debts and liabilities are separate from the owner’s personal assets. However, some business owners may prefer the specific liability protections provided by an LLC over a corporation, depending on the nature of their business and the potential risks involved.
  • Increased Flexibility in Profit Distribution: Unlike Delaware corporations, which typically distribute profits according to the percentage of shares owned, LLCs can offer more flexibility in profit distribution among members. This can be particularly advantageous for businesses with multiple owners who contribute differently to the company’s success.
  • Potential for Easier Transfer of Ownership: Depending on the specific rules and regulations in Delaware, transferring ownership of an LLC may be easier than transferring ownership of a corporation. This is an important consideration for business owners who plan to sell or transfer their business.

While the benefits of converting Delaware corporation to an LLC can be significant, it’s essential to carefully consider the potential challenges and implications of the conversion process.

FAQs

What is a Delaware LLC?
A Delaware LLC is a limited liability company formed in Delaware.
Can a Delaware corporation be converted to a Delaware LLC?
Yes, a Delaware corporation can be converted to a Delaware LLC.
How do I convert my Delaware corporation to a Delaware LLC?
You must file a certificate of conversion with the Delaware Secretary of State.
What is the advantage of converting a Delaware corporation to a Delaware LLC?
A Delaware LLC offers better flexibility, tax benefits, and asset protection than a corporation.
What are the requirements for converting a Delaware corporation to a Delaware LLC?
You must have a plan of conversion, obtain approval from shareholders or directors, and file a certificate of conversion with the Delaware Secretary of State.
How long does it take to convert a Delaware corporation to a Delaware LLC?
It can take about a month to convert a Delaware corporation to a Delaware LLC.
Will I need to dissolve my corporation before converting it to an LLC?
No, you can convert your Delaware corporation to a Delaware LLC without dissolving it.
How much does it cost to convert a Delaware corporation to a Delaware LLC?
The cost depends on the state filing fee and any legal fees associated with the conversion.
Can I change my corporation’s name when I convert it to an LLC?
Yes, you can change your corporation’s name when you convert it to an LLC.
Do I need to get a new tax ID number when I convert my corporation to an LLC?
No, you can keep your same tax ID number when you convert your corporation to an LLC.
Will my corporation’s debts transfer to the LLC when I convert it?
Yes, your corporation’s debts will transfer to the LLC when you convert it.
Do I need to form a new LLC if I switch from a corporation to an LLC in Delaware?
No, you do not need to form a new LLC if you switch from a corporation to an LLC in Delaware.
Can I add or remove LLC members when I convert a corporation to an LLC?
Yes, you can add or remove LLC members when you convert a corporation to an LLC.
Can I convert a non-Delaware corporation to a Delaware LLC?
Yes, you can convert a non-Delaware corporation to a Delaware LLC, but you will need to follow the laws of the state where the corporation was originally formed.
What is the tax treatment of a Delaware LLC?
A Delaware LLC is a pass-through entity for tax purposes, which means that the LLC itself does not pay taxes.
Can I convert an LLC to a corporation in Delaware?
Yes, you can convert an LLC to a corporation in Delaware, but you will have to comply with the state’s conversion laws.
What are the liability protections of a Delaware LLC?
A Delaware LLC provides limited liability protections to LLC members, which means that the members’ personal assets are protected from business liabilities.
Can I still file as an S corp in Delaware if I convert my corporation to an LLC?
No, LLCs cannot file as an S corporation for tax purposes.
Do I need to get a business license in Delaware if I convert my corporation to an LLC?
Yes, you will need to obtain a business license in Delaware if you convert your corporation to an LLC.
Can I change my Delaware LLC’s tax classification?
Yes, you can change your Delaware LLC’s tax classification by filing Form 8832 with the IRS.
Can I convert a foreign corporation to a Delaware LLC?
Yes, you can convert a foreign corporation to a Delaware LLC, but you will need to follow the laws of the foreign country and Delaware.
Do I need to notify my creditors when I convert my corporation to an LLC in Delaware?
Yes, you should notify your creditors when you convert your corporation to an LLC in Delaware.
What is the annual franchise tax for a Delaware LLC?
The annual franchise tax for a Delaware LLC depends on the number of authorized shares and the value of the company’s assets.
Can a Delaware LLC be owned by non-US citizens?
Yes, a Delaware LLC can be owned by non-US citizens.
Will my corporation’s trademarks transfer to the LLC when I convert it?
Yes, your corporation’s trademarks will transfer to the LLC when you convert it.
Can I convert my Delaware LLC to an S corp?
No, LLCs cannot be converted to S corporations.
Can I change my LLC’s operating agreement when I convert my corporation to an LLC?
Yes, you can change your LLC’s operating agreement when you convert your corporation to an LLC.
Who should I talk to for legal advice when converting my corporation to a Delaware LLC?
You should speak with a Delaware business attorney for legal advice when converting your corporation to a Delaware LLC.
What’s the process of converting a Delaware corporation to an LLC?
The process involves filing a certificate of conversion with the Delaware Secretary of State.
Can you convert a Delaware corporation to an LLC without starting a new company?
Yes, you can convert an existing Delaware corporation to an LLC without forming a new company.
What documents do I need to file to convert a Delaware corporation to an LLC?
You will need to file a certificate of conversion, certificate of formation, and an operating agreement.
How long does it take to convert a Delaware corporation to an LLC?
The processing time for the conversion varies, but it typically takes five to seven business days.
How much does it cost to convert a Delaware corporation to an LLC?
The filing fees for converting a Delaware corporation to an LLC vary depending on the state. In Delaware, it costs $200 to file a certificate of conversion.
Do I need to get a new employer identification number (EIN) after converting to an LLC?
If you have an EIN for your Delaware corporation, you’ll need to apply for a new one once you’ve converted to an LLC.
What happens to the shares of a Delaware corporation when it’s converted to an LLC?
The shares of the Delaware corporation are converted into membership interests in the LLC.
Will converting a Delaware corporation to an LLC affect my business name?
If you want to keep your business name, you can register it as a fictitious name for the LLC. Otherwise, you’ll need to choose a new name.
Can a Delaware corporation have a single member and then convert to an LLC?
Yes, a Delaware corporation with a single member can convert to an LLC.
What are some advantages of converting a Delaware corporation to an LLC?
Some advantages include less paperwork, reduced liability, and flexibility in managing the business.
What are some disadvantages of converting a Delaware corporation to an LLC?
Some disadvantages include higher tax rates, fees, and lack of access to venture capital and angel investors.
Does converting a Delaware corporation to an LLC require shareholder approval?
Yes, shareholders of a Delaware corporation must approve the decision to convert to an LLC.
Can a foreign corporation registered in Delaware convert to an LLC?
Yes, a foreign corporation registered in Delaware can convert to an LLC.
Can a Delaware corporation with a board of directors convert to an LLC?
Yes, a Delaware corporation with a board of directors can convert to an LLC.
Will converting to an LLC affect my liability protection?
Converting to an LLC will typically enhance your liability protection over that of a corporation.
Will converting to an LLC affect my tax status?
It depends on the specifics of the business and its tax structure. It’s important to consult with a tax professional to determine if it will affect your tax status.
Are LLCs subject to franchise taxes in Delaware?
Yes, Delaware LLCs are subject to a franchise tax.
What’s the minimum number of members required to form an LLC in Delaware?
Delaware does not require a minimum number of members to form an LLC.
What are some characteristics of a Delaware LLC?
Some characteristics of a Delaware LLC include flexibility in management structure, simplified record-keeping, and pass-through taxation.
Can a Delaware LLC be managed by its members?
Yes, in a member-managed LLC, the LLC’s members are responsible for the business’s management.
Can a Delaware LLC be managed by non-members?
Yes, in a manager-managed LLC, the members can hire non-members to manage the business.
Does a Delaware LLC have pass-through taxation?
Yes, unless the LLC elects to be taxed as a corporation, Delaware LLCs have pass-through taxation.
Can a Delaware LLC be taxed as an S corporation?
Yes, a Delaware LLC can elect to be taxed as an S corporation if it meets the eligibility requirements.
How is the governance of a Delaware LLC set up?
The governance of a Delaware LLC is outlined in its operating agreement, which can be tailored to the needs of the business.
Are there any restrictions on foreign ownership of a Delaware LLC?
No, in Delaware there are no restrictions on foreign ownership of an LLC.
Can a Delaware LLC be a nonprofit organization?
Yes, a Delaware LLC can be a nonprofit organization, although it requires a special qualification process.
Can a Delaware LLC provide professional services?
Yes, a Delaware LLC can provide professional services as long as it is in compliance with Delaware’s regulations.
Can a Delaware LLC issue stock?
No, LLCs cannot issue stock. Instead, they issue membership interests.
What happens if a Delaware LLC member passes away or leaves the LLC?
The LLC’s operating agreement dictates how the business will continue in the event of a member’s death or departure. If there is no operating agreement, Delaware’s LLC laws specify how to handle these situations.

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Conclusion

Converting Delaware corporation to an LLC can offer significant benefits for your business, including tax flexibility, simplified management, and reduced administrative requirements. However, it’s essential to carefully consider the potential challenges and implications of the conversion process. Following the steps outlined in this guide and seeking professional advice, you can successfully convert your corporation to an LLC and position your business for continued success.

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