LLC to C-Corp Conversion Guide

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.

🚨
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.
💡
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

📋 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)
🚨
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
MOST POPULAR
Standard Conversion
$7,500

Multiple members, revenue-generating, pre-funding

  • Everything in Basic, plus:
  • Section 368(a) reorganization (preferred for VC)
  • QSBS optimization strategy
  • Vesting schedule setup for founders
  • Stock option plan (equity incentive plan)
  • IP assignment agreements
  • Cross-state merger (if WY/other → DE)
  • 409A valuation coordination
  • Investor-ready documentation package
  • Tax opinion letter (confirming tax-free treatment)
Complex Conversion
$15,000+

High valuation, multiple classes, in fundraising

  • Everything in Standard, plus:
  • High-value IP or appreciated assets
  • Multiple share classes (common + preferred)
  • Existing investor rights to address
  • Concurrent funding round coordination
  • Tax structuring for built-in gains
  • 409A valuation (full independent appraisal)
  • Complex cap table restructuring
  • Ongoing legal support through funding close
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What's NOT Included: State filing fees ($200-500), registered agent fees ($50-150/year), accounting fees for tax returns ($1,500-3,000), and 409A valuation if needed ($2,000-5,000). Budget an additional $4,000-$9,000 for these third-party costs.

📞 Ready to Convert?

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

Direct Contact:

Email: owner@terms.law

Attorney: Sergei Tokmakov, Esq.