LLC to C-Corp Conversion Guide

Published: November 14, 2025 • Incorporation

LLC to C-Corp Conversion Guide | Delaware 368(a) Reorganization & QSBS Strategy

Tax-free reorganization, QSBS strategy, and Delaware 368(a) walkthrough for VC-backed startups

$15K-50K Typical Conversion Cost

5 Years QSBS Holding Period

$10M-50M Tax-Free Gain (QSBS)

90%+ Of VCs Require C-Corps

⏰ When Should You Convert?

Timing your conversion correctly can save hundreds of thousands in taxes and preserve QSBS benefits. Here's how to decide.

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The #1 Mistake: Converting after you start fundraising talks. VCs will require a C-Corp before investing, and a rushed conversion can cost you QSBS benefits, trigger taxes, or delay your funding round by 2-3 months.

Should You Convert Now? Decision Framework

❓ Are you planning to raise VC funding in the next 12 months?

YES
→ Convert NOW, before any funding conversations. VCs expect Delaware C-Corps.

NO
→ Continue to next question

❓ Do you have high-value intellectual property or have you built significant product value?

YES
→ Convert ASAP. Delaying increases your IP's FMV, making conversion more expensive or taxable.

NO
→ Continue to next question

❓ Has your LLC made significant profits or appreciated in value?

YES
→ Convert now while valuation is lower. Conversion can trigger tax on built-in gains if done wrong.

NO
→ Ideal time to convert—low/zero valuation makes conversion cleaner.

❓ Do you want QSBS tax benefits for founders and early investors?

YES
→ Convert NOW. QSBS clock starts when C-Corp issues stock. Earlier = more tax-free gains.

NO
→ You can wait, but most startups eventually want QSBS.

📅 Optimal Conversion Timeline

Scenario	When to Convert	Why
Pre-Product / Idea Stage	NOW (form as C-Corp instead)	Zero assets = clean conversion. Start QSBS clock immediately.
MVP Built, Pre-Revenue	NOW (before revenue)	Low valuation makes 368(a) reorganization straightforward. Minimal tax risk.
Generating Revenue ($50K-500K/yr)	Before hitting $1M ARR	Still manageable valuation. Convert before VC talks start.
Profitable or High Revenue	ASAP, but with tax advisor	Higher valuation means more complex. May need 409A valuation.
In Fundraising Talks	Too late—should have converted 3-6 months ago	Rushed conversion can delay funding, miss QSBS benefits, or trigger taxes.

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Pro Tip: If you're even thinking about VC funding, convert now. It takes 2-3 months to complete properly, and you want it done before you start fundraising conversations. VCs won't negotiate—they require Delaware C-Corps.

💰 QSBS: Why Conversion Timing Matters

Qualified Small Business Stock (QSBS) under IRC §1202 can exclude up to $10M or 10x your investment (whichever is greater) from capital gains tax. But the clock starts when the C-Corp issues stock—not when your LLC was formed.

🎯 The QSBS Tax Advantage

Without QSBS:

Exit at $50M: You own 20% = $10M

Investment: $100K

Gain: $9.9M

Long-term capital gains tax (23.8%): -$2,356,200

Net: $7,543,800

With QSBS (100% Exclusion):

Exit at $50M: You own 20% = $10M

Investment: $100K

Gain: $9.9M

QSBS exclusion: $9.9M (up to $10M limit)

Tax: $0

Net: $10,000,000

Save $2.36M in taxes! 🎉

⏱️ QSBS Requirements & Timing

To Qualify for QSBS:

Must be a C-Corporation (not LLC, S-Corp, or partnership)
Gross assets ≤ $50M at time of stock issuance
Active business (not passive investment holding company)
Domestic corporation (US entity)
Stock acquired at original issuance (not secondary purchase)
Hold stock for at least 5 years before sale

⚠️

Critical QSBS Timing Issue:

If you convert from LLC to C-Corp, the QSBS holding period starts on the conversion date, not when you formed the LLC. This means:

Convert in 2025 → Must hold until 2030 for QSBS
Exit in 2028 (3 years later) → NO QSBS benefits
Exit in 2031 (6 years later) → Full QSBS benefits

🧮 QSBS Benefit Calculator

Expected Exit Value ($M)

Your Ownership %

Your Initial Investment ($)

Conversion Date

📋 Tax Implications: Avoiding a Taxable Conversion

The IRS treats LLC-to-C-Corp conversion as a taxable event unless you follow specific rules. Here's how to convert tax-free.

⚖️ Two Tax-Free Conversion Methods

Method	Section 351 Exchange	Section 368(a) Reorganization
Best For	Simple conversions, same members become shareholders	Complex situations, changing ownership, preparing for VC funding
How It Works	LLC members contribute LLC interests to new C-Corp in exchange for stock	LLC merges into new C-Corp (statutory merger under state law)
Control Requirement	Transferors must own 80%+ of C-Corp immediately after	No specific control requirement
State Law Merger?	No (tax election only)	Yes (formal merger under Delaware/state law)
Complexity	Lower (mostly tax filings)	Higher (legal merger + tax treatment)
Cost	$2,500-$7,500	$5,000-$15,000
VC Preference	Acceptable for simple cases	Preferred (cleaner for future rounds)

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Common Tax Traps That Trigger Taxable Conversion:

Debt assumption: If C-Corp assumes LLC liabilities > member's basis, excess is taxable
Appreciated assets: Contributing assets worth more than basis can trigger gain
Loss of control: In §351, if transferors don't own 80%+ post-conversion, it's taxable
Boot received: Getting cash or other property (not just stock) triggers recognition
Investment company rules: Converting an LLC holding portfolio investments can be taxable

✅ Requirements for Tax-Free Conversion

Section 351 Requirements:

Transfer LLC interests for C-Corp stock
Transferors own 80%+ immediately after
Only stock received (no cash/debt)
File Form 8832 (if changing entity classification)
File Form 1120 as C-Corp going forward

Section 368(a) Requirements:

State law statutory merger (Delaware DGCL §251/252)
Continuity of interest (shareholders receive stock)
Continuity of business enterprise
Business purpose for merger
File Articles of Merger with Delaware

📝 Delaware 368(a) Reorganization: Step-by-Step

The preferred method for VC-backed startups. This is the cleanest path from LLC to Delaware C-Corp.

Form Delaware C-Corporation

Create a new Delaware C-Corporation that will be the surviving entity.

File Certificate of Incorporation with Delaware Division of Corporations
Appoint initial directors and officers
Adopt bylaws
Authorize shares (typically 10,000,000 common shares)
Obtain EIN from IRS for new C-Corp

Timeline: 1-2 weeks

Cost: $89 filing fee + $50-150 registered agent

Draft Plan of Merger

Create formal merger agreement between LLC and C-Corp.

Identify merging entities (LLC merges into C-Corp)
Specify conversion ratio (LLC units → C-Corp shares)
State that C-Corp is the surviving entity
Include representations and warranties
Attach conversion schedule showing each member's new ownership

Timeline: 3-5 days (with attorney)

Cost: Included in legal fees

Member/Manager Approval

LLC members vote to approve the merger (check your Operating Agreement for required vote percentage).

Typically requires majority or supermajority vote
Document approval with written consents or meeting minutes
Each member signs acknowledging conversion of units to stock
Manager(s) sign merger agreement on behalf of LLC

Timeline: 1-7 days (depending on member availability)

Board and Shareholder Approval (C-Corp)

C-Corp board of directors and shareholders approve merger.

Board adopts merger resolution
Shareholders vote to approve (if required by Delaware law)
Document approval with written consents

Timeline: 1-2 days

File Certificate of Merger

File Articles/Certificate of Merger with Delaware and LLC's home state (if different).

File in Delaware (surviving entity's state)
File in LLC's formation state (if not Delaware)
Pay filing fees in each state
Specify effective date of merger

Timeline: 3-10 business days (state processing)

Cost: $200-500 per state (filing fees)

Issue Stock Certificates

C-Corp issues stock to former LLC members per conversion schedule.

Issue stock certificates (physical or electronic)
Record issuances in stock ledger
Update cap table
Each shareholder receives shares equal to their LLC units (per conversion ratio)

Timeline: 1-3 days after merger effective

83(b) Elections (If Applicable)

If stock is subject to vesting, file 83(b) elections within 30 days.

Each founder receiving vesting stock must file 83(b)
File with IRS within 30 days of stock issuance
Send copy to IRS, keep copy for records, attach to tax return
Failure to file = taxed on vesting at future FMV (can be catastrophic)

Timeline: Must complete within 30 days of merger

Cost: $0 (DIY) or $200-500 (attorney preparation)

Transfer Assets and Close LLC

Transfer contracts, IP, accounts, and other assets to C-Corp. Dissolve LLC.

Update bank accounts to C-Corp name
Transfer intellectual property (trademarks, patents, copyrights)
Assign contracts and agreements to C-Corp
Update vendor relationships, payment processors, etc.
File Certificate of Cancellation/Dissolution for LLC

Timeline: 2-4 weeks

Cost: $50-200 (state dissolution fees)

Tax Compliance & Reporting

File final LLC tax return and begin C-Corp tax filings.

File final Form 1065 (partnership return) for LLC
Issue final K-1s to members
File Form 1120 (C-Corp return) going forward
Report merger on tax returns with reorganization statement
Consider getting tax opinion letter confirming tax-free treatment

Timeline: At tax filing deadlines

Cost: $1,500-5,000 (accountant fees)

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Total Timeline: Plan for 2-3 months from start to finish. Rushed conversions increase the risk of errors, missed tax elections, or unfavorable terms. Start the process before you need it.

🏔️ Wyoming LLC → Delaware C-Corp Conversion

Wyoming LLCs are popular for privacy and low costs, but VCs require Delaware C-Corps. Here's the conversion path.

⚠️

Why This Conversion Is Common:

Many founders form Wyoming LLCs for privacy, low costs, and asset protection. But when it's time to raise VC funding, they need to convert to Delaware C-Corp. This is one of the most common conversion paths we handle.

🗺️ Wyoming LLC → Delaware C-Corp Process

Step 1

Form Delaware C-Corporation

Create new Delaware C-Corp (this will be the surviving entity).

File Certificate of Incorporation in Delaware
Appoint Delaware registered agent
Obtain new EIN for C-Corp

Step 2

Draft Cross-State Merger Agreement

Wyoming LLC merges into Delaware C-Corp (cross-jurisdictional merger).

Wyoming law allows mergers with out-of-state entities (WY §17-29-1101)
Delaware permits inbound mergers (DGCL §252)
Plan of Merger must comply with both states' laws

Step 3

Member and Manager Approval

Wyoming LLC members vote to approve merger (per Operating Agreement).

Step 4

File in Both States

File Certificate of Merger in Delaware and Wyoming.

Delaware: File Certificate of Ownership & Merger ($200 fee)
Wyoming: File Articles of Merger with Secretary of State ($100 fee)

Step 5

Issue Stock & Complete Conversion

Delaware C-Corp issues stock to former WY LLC members. File 83(b) elections if needed. Dissolve WY LLC.

🤔 Wyoming-Specific Considerations

Privacy vs VC Requirements:

Wyoming LLCs don't require member names on public filings (privacy benefit). But C-Corps require shareholder lists, and VCs will conduct full diligence on ownership.

Solution: Privacy benefits end when you take VC funding anyway. VCs require full transparency.

Wyoming Charging Order Protection:

Wyoming has the strongest charging order protection for LLCs. C-Corps don't have this protection.

Solution: If asset protection was your goal, consider keeping a separate Wyoming LLC for asset holding, separate from your operating C-Corp.

✅

Good News: Wyoming to Delaware conversions are routine. Both states have well-established statutory merger procedures, and the process is straightforward with experienced counsel.

💼 Conversion Services & Pricing

Get your LLC-to-C-Corp conversion done right. Includes tax planning, legal documentation, and QSBS optimization.

Basic Conversion

$3,500

Simple LLC with 1-2 members, no significant assets

Tax structure analysis (351 vs 368)
Form Delaware C-Corporation
Plan of Merger or 351 exchange docs
Member/shareholder consents
State filings (Delaware + home state)
Stock issuance and cap table setup
83(b) election preparation
Basic tax guidance memo

📞 Ready to Convert?

Get a consultation to discuss your conversion timeline, tax implications, and QSBS strategy.

Name *

Email *

Current Entity Type *

When are you planning to raise VC funding? *

Number of Members/Owners

Approximate Company Valuation (if known)

Additional Details

Direct Contact:

Email: owner@terms.law

Attorney: Sergei Tokmakov, Esq.