For startup founders with big ambitions, forming as an LLC might have been the right choice at the beginning, but it may not take you all the way. As your company approaches a seed or Series A round, converting to a C Corporation can become a strategic necessity.
Below, we break down why this matters, how to do it, and how Fidelity Private Shares can help you every step of the way.
Why Convert an LLC to a C Corporation for Venture Capital?
Many startups begin as LLCs because they’re simple to form, offer pass-through taxation, and require little paperwork. But as your company scales and seeks outside funding, that flexibility may become a limitation.
Most venture capitalists and institutional investors won’t fund an LLC because the structure can complicate ownership, tax reporting, and equity distribution.
In short, converting to a C Corporation helps make your company “investor-ready.” It creates a formal equity structure, standardizes governance, and allows for scalable growth through stock-based financing.
Investor Mandate
Venture capital firms overwhelmingly prefer (and often require) Delaware C Corporations. They’re familiar, efficient, and built to support growth through equity financing. Unlike LLCs, C Corps can issue preferred stock—an essential tool for VC investment—and use standardized governance documents that help simplify due diligence and long-term management.
Talent & Equity
Attracting and retaining talent often depends on the ability to offer equity. In an LLC, granting ownership typically requires issuing “profit interests,” which can be complex and create messy tax consequences. C Corporations make it easy to implement employee stock option plans (ESOPs), ensuring that team members can share in the company’s success without administrative headaches.
QSBS Eligibility
Only stock in a qualified C Corporation is eligible for the Qualified Small Business Stock (QSBS) exemption.
- For shares issued before July 4, 2025, the exclusion is up to $10 million or 10x basis, and the company’s gross assets must not exceed $50 million at the time of issuance.
- For shares issued on or after July 4, 2025, the exclusion increases to $15 million or 10x basis, and the gross asset limit rises to $75 million.
- The QSBS clock starts when C Corp stock is issued—not when the LLC was formed. Converting does not retroactively qualify prior LLC ownership.
Key Facts About the Delaware LLC to C Corp Conversion
Delaware remains a top choice for startups because of its strong corporate law and flexible conversion process. When converting from an LLC to a C Corporation in Delaware, you don’t typically need to dissolve your company or start over.
Instead, you can perform a statutory conversion, which automatically transfers all assets, liabilities, contracts, and tax IDs to the new corporation. Your EIN typically remains the same, and business continuity is preserved. This clean, efficient process is one of the main reasons Delaware is considered the gold standard for venture-backed entities.
LLC to C-Corp Conversion Methods
While the Delaware method is the most popular, it’s important to understand the three primary ways an LLC can convert to a C Corporation, as requirements vary by state.
1. Statutory Conversion
This is typically the simplest and most direct approach when available under state law. The LLC files two documents with the state—the Certificate of Conversion (or equivalent) and the Certificate of Articles of Incorporation—and becomes a corporation once the state approves the filing. However, the exact documents, naming conventions, and additional requirements—such as a Plan of Conversion or member approval thresholds—can vary by jurisdiction.
All assets, contracts, and liabilities typically transfer automatically, eliminating the need to dissolve the LLC or create a new entity. While this approach minimizes paperwork compared to other methods, businesses should confirm state-specific rules, including whether tax clearance or payment of outstanding taxes is required before approval, and update licenses, contracts, and governance documents after conversion.
2. Statutory Merger
In states that don’t allow statutory conversions, the next option is a statutory merger. The process involves creating a new C Corporation and merging the LLC into it.
While effective, this approach requires drafting merger agreements, updating ownership records, and often engaging more legal support. The result is functionally the same—a C Corporation—but typically with more complexity and cost.
3. Non-Statutory Conversion (Asset Transfer)
This is often the least efficient and most complicated path. It involves forming a new C Corporation, transferring all the LLC’s assets and contracts to it, and then dissolving the LLC.
Because this process is essentially a sale of assets, it can trigger tax consequences for both the company and its owners. It’s typically used only when neither a statutory conversion nor a merger is possible.
The LLC to Delaware C Corp Conversion Process
Once you’ve chosen your method, here’s what the process generally looks like for a Delaware conversion.
1. Generate LLC Consent and a Plan of Conversion
Your LLC members must approve the decision to convert. The Plan of Conversion outlines how ownership interests will translate into C Corp shares, the structure of the new corporation, and the effective date of conversion. This document serves as the legal foundation for the transition.
2. File Two Documents with the State of Delaware Division of Corporations
Next, file the Certificate of Conversion and the Certificate of Incorporation. These filings officially convert your LLC into a C Corporation once approved by the state. The company’s assets, contracts, and obligations automatically transfer under the new entity.
3. Generate and Finalize Corporation Documents
Once the conversion is approved, your legal team will draft key corporate governance documents—such as bylaws, board resolutions, and founder stock purchase agreements. You’ll also issue stock certificates, update your cap table, and assign board seats.
Platforms like Fidelity Private Shares help simplify this process by centralizing documents, automating filings, and syncing your cap table with your corporate records.
Tax Implications to Consider: Section 351 and QSBS Timing
Converting your LLC to a C Corporation can have tax advantages. Two areas require careful timing: Section 351 and QSBS eligibility.
IRC Section 351 Non-Taxable Exchange
A properly executed conversion is typically non-taxable under Section 351 of the Internal Revenue Code, which covers the transfer of assets to a corporation in exchange for stock.
However, this non-taxable treatment depends on ownership continuity. If the original LLC members retain at least 80% of the new corporation’s stock after the conversion, no gain or loss is recognized. But if an investment round closes immediately after conversion and that ownership drops below 80%, the IRS may treat the transaction as taxable income.
Qualified Small Business Stock (QSBS) Considerations
The QSBS clock begins on the date your C Corp stock is issued, not when the LLC was formed. That means founders who wait too long to convert delay their ability to take advantage of QSBS benefits.
Also, if your company’s gross assets exceed $50 million before conversion, the resulting stock will not qualify. Timing your conversion before hitting that threshold can typically make a difference in long-term tax outcomes.
Alternatives to Converting to a C Corp
While converting to a C Corporation is usually the right move for growth-minded startups, some companies may consider alternatives.
If you’re not seeking venture funding, you may be able to remain an LLC and still benefit from pass-through taxation. Some founders also explore hybrid approaches, such as forming a new C Corp for fundraising while keeping the LLC for operations, but this often creates complexity and confusion during due diligence.
Ready to Convert? Start Your Journey with Fidelity Private Shares
Converting your company’s structure is a milestone moment, and one that requires precision. Fidelity Private Shares can help you get started. Start the incorporation process now.
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