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Potential benefits of transitioning from an LLC to a corporation

On Behalf of | Oct 4, 2023 | business law

If you run a limited liability company in Wilton, Connecticut, it may be time to reassess the legal framework of your business. According to the U.S. Chamber of Commerce, it is common for business owners to change their legal structure for various reasons, such as tax purposes or during a merger.

To better align with your company’s needs and goals, there are several benefits to transitioning your legal structure from an LLC to a corporation.  Those need to be balanced against the potential downsides of moving from a pass-through entity to an entity that is taxed at the entity level.

Tax benefits

LLCs offer pass-through taxation, reporting profits and losses on owners’ personal tax returns. However, depending on your situation, corporations may offer potential tax advantages, such as more tax planning options and more deductible business expenses.  These benefits need to be weighed against the fact that the income of a corporation may be subject to taxation twice (once when the corporation earns it and a second time if it is distributed to owners in the form of dividends). However, favorable tax rates on dividends and capital gains for shareholders together with other aspects of the corporate structure may make a corporation the right entity for your business.  A tax attorney or accountant can help owners work through the tax implications of corporations versus pass-through tax entities, like LLCs.

Investment capital

Switching to a corporation offers the advantage of wider access to investment capital. Corporations can issue stock, enabling them to attract investors. This structure expands financing options, including venture capital and initial public offerings. It also attracts talent with stock options, which helps with recruitment and retention efforts.

Enhanced credibility

Transitioning your legal structure can enhance your company’s credibility. Many investors, partners and customers view corporations as more established entities compared to LLCs. This can lead to improved relationships with suppliers, better credit terms and the added ability to secure profitable partnerships.

Limitless growth

Corporations are great for expansion and extensive growth due to their unlimited shareholder capacity and flexible hierarchy. This is invaluable during rapid scaling, as it accommodates many stakeholders and investors. Regardless of ownership or management changes, corporations can endure and provide a stable foundation for long-term planning and development.

Changing from an LLC to a corporation is a strategic move that can put your business on the road to continuous growth and success.