What Are the Financial Considerations When Starting a Business Conversion

It’s quite natural, and in some cases, very good news, for a company to need a business conversion. One of the most common reasons is that a business is doing well, growing, and has become too big to qualify in its current class and must move to another. Entrepreneurs may want to know how to start a business conversion if they change from an LLC to a corporation or from a corporation to an LLC.

State Is an Important Factor

If it is scaling down operations, a company may need to convert from a corporation to an LLC for reasons such as business contractions or take advantage of the tax structure. But how to start a business conversion will vary a lot from state to state, and in some states, it may not even be allowed depending on the circumstances.

For example, in California, if a business is looking at how to start a business conversion, the pricing is different based on whether the company is local or not. If a small Californian company is converting to an LLC, if that business is considered a California corporation, the filing fee is $150. However, for other companies that aren’t classified as such, the filing fee is only $70. The type of conversion also matters, as there is a difference between an LLC converting to an S-Corps, versus a C-Crop. Total costs for conversion can range between less than $100-$1500, depending on state and corporate status.

Financial Factors

A bigger factor for finances is stocks and the tax structure. A common reason for an LLC to convert to a corporation is to offer shares to investors. How many shares are initially planned often determines the size of the franchise tax that will be paid, with more shares requiring higher franchise tax payments.

Business owners should also be aware that a business conversion from LLC to a corporation will require filing taxes under two separate tax structures. So, for example, if a business converts from an LLC to a corporation, corporate taxes will have to be filed twice that year, once when the company was still an LLC and a second time when it converted to a corporation. However, this can be mitigated by choosing to convert at the start of a new business year rather than during one.

Help Is Available

For companies that want to ensure the smoothest possible experience, instead of trying to figure out how to start a business conversion on their own, services are available from other companies to help. These companies are already familiar with the process of LLC formation, business conversion, and even business dissolution, as it varies from state to state. They know the specific fees involved, and, more importantly, they know the rules, regulations, information, and documents required for a business conversion to be quickly assessed and approved by the state.

While it is an additional investment, these services ensure that a company has the best possible chance at a smooth business conversion, as well as any of the other business activities that may be required to maintain compliance in the future, such as submitting annual reports if needed and adhering to additional regulations.