Q: My partners and I have discussed re-incorporating our company from a C-corp to an LLC. What is the process for converting a corporation to an LLC in Delaware?
Thank you to a customer from Delaware for that great question! Converting your company from a corporation to an LLC is relatively simple: get permission from your board of directors, draft the LLC’s internal documents, pay your corporation’s franchise tax, and submit the required documents to the Delaware Secretary of State. Below, we’ll go over each step to converting your Delaware corporation to an LLC.
Step 1: Get Board Approval
A corporation is ruled by a board of directors,consisting of shareholders. Additionally, the corporation’s Articles of Incorporation and corporate bylaws usually list out the requirements for voting on big things (like converting your business’ entity type). You will need to hold a vote in accordance with your corporate policies. As long as your shareholders/board of directors majority approve the conversion, you’re ready to move on to:
Step 2: Draft LLC Operating Agreement
Since a corporation has different documentation and structural requirements than an LLC, you will need to create new internal documents, like the LLC Operating Agreement. These can be based off of your corporation’s internal documents, but typically LLCs are more flexible and have less oversight than corporations and you might want this reflected in your LLC’s internal processes and policies.
Not sure where to begin? Download Northwest’s Delaware LLC Operating Agreement to get started.
Step 3: Pay Corporate Franchise Tax
Before you can change entity types with the Delaware Secretary of State, you will need to pay your corporation’s Delaware franchise tax and fill out the annual report for the corporation. Franchise tax in Delaware is determined in one of two ways:
Authorized Share Method
This is the default method for paying franchise tax for a corporation in Delaware. It breaks down like this:
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- If you have 5,000 shares or less, you pay the minimum amount of $175.
- If you have between 5,001 and 10,000 shares, you pay $250.
- For each additional 10,000 shares, you add $75 to the total tax. The maximum you can pay is $180,000.
Assumed Par Value Capital Method
This is an opt-in method, but is usually a cheaper option if you have a lot of shares. So, for example, if you have a million shares, you’ll save money by doing the assumed par value capital method ($350) compared to the authorized share method ($7500). Since this method is based off issued shares, authorized shares, and total gross assets, it’s more complicated, but you might stand to save a lot of money.
Read more about the Assumed Par Value Capital Method.
Annual Report Fee
At the same time as your corporation’s franchise tax, you’ll need to file and pay your annual report. This is mandatory before you can submit conversion paperwork to the Secretary of State. Your annual report is $50.
Note: Once your business is converted into an LLC, you will pay a flat rate of $300 for franchise tax due by June 1st. No annual report (or accompanying fee) is required.
Step 4: Submit Formation Documents
Now that your corporation is all settled, you’ve gotten approval from your shareholders, and you’re ready to put your LLC’s internal documents in place, you’re can file with the Delaware Secretary of State.
To convert your Delaware corporation to an LLC, you need to file two documents: the Certificate of Conversion and the Certificate of Formation. The Delaware Secretary of State offers both the LLC conversion formation documents in one pdf, and you can file them together for a total filing fee of $290.
Certificate of Conversion
The Certificate of Conversion costs $200 to file with the Delaware Secretary of State. This is the document that formally ends your corporation status and starts your LLC status. It includes:
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- The original corporation’s name
- The original corporation’s jurisdiction of formation
- The date of original formation
- The name of the new LLC (must be the same as what is listed in the Certificate of Formation)
Certificate of Formation
The Certificate of Formation costs $90 to file and formalizes your new entity. It includes:
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- The name of the new LLC (must be the same as what is listed in the Certificate of Conversion)
- The name and address of the Delaware registered agent
Need a Delaware registered agent? Northwest’s services are only $125 a year!
Why Convert To An LLC?
Typically, a corporation converts to an LLC when the business no longer wants to issue stock shares or raise capital. Since corporations are more attractive to investors, a lot of businesses needing external funding start either as a corporation or as an LLC with C-corp tax election status. If your business is looking to downsize, maintain, or just generally have less directorial and governmental oversight, converting to an LLC can help you achieve this.
Why Not Convert To An LLC?
If the goal of your conversion is to invalidate legal claims made against the corporation, void contracts made by the corporation, or otherwise get out of a situation the corporation has entered, think again. Even if your corporation changes entity types, you’re still legally obligated to uphold all contracts and face legal claims.