Llc conversion to corporation ein

We notice you're visiting us from a region where we have a local version of Inc.com.

The largest drawback of corporations versus LLCs is double taxation. In an asset sale of a corporation (acquirers often favor asset sales), the proceeds will be taxed once at the corporate level and then again at the individual level. On the other hand, LLCs offer pass-through taxation which means that the LLC passes gains through to its owners on a tax-free basis and the owners are solely taxed at a personal level. Assuming a $100 million exit in an asset sale and a 28% personal tax rate, the owners of an LLC would walk away with $72 million whereas the owners of a corporation would receive a mere $50 million. Said another way, the owners of a corporation would need to exit at $144 million, 44% higher, in order to receive the same after-tax proceeds as the owners of an LLC.

Second, venture funds typically avoid investing LLCs because LLCs generate gains which can be passed-through to a fund's investors, creating unrelated business taxable income, or UBTI. A venture fund's limited partners are typically pension funds and endowments which are tax-exempt entities. In order to retain their tax-exempt status, pension funds and endowments are prohibited from receiving a given amount of UBTI. As a result, venture funds have traditionally refused to invest in LLCs to avoid dealing with potential UBTI issues and most entrepreneurs haven't realized there is any other choice.

When SeedInvest raised our Series A from venture capitalists, we felt considerable pressure to convert into a C-corporation. But we understood the tax implications from our prior experience as private equity investors and we held our ground. In the end, we were able to successfully raise an institutional round while remaining an LLC and maintaining the potentially substantial tax benefits. If you do seek venture capital you will most likely receive similar encouragement to convert to a corporation, but if you are able to hold out, the rewards might very well be outsized.