How to Know When to Convert From LLC to C-Corp

Calculate the revenue and tax thresholds that make converting from LLC to C-Corp worth the added complexity and costs.

1. Calculate your current self-employment tax burden. Take your net LLC profit and multiply by 15.3% (self-employment tax rate through 2026). Add your ordinary income tax rate on the same profit. This is your current total tax rate on business earnings — typically 30-50% for profitable LLCs.
2. Model C-Corp tax on the same earnings. Calculate 21% federal corporate tax plus your state corporate rate (0-12% depending on state). Then add personal tax on any salary you'd pay yourself — typically $60,000-120,000 for small businesses. Compare total tax burden to your LLC calculation.
3. Factor in C-Corp compliance costs. Add $3,000-8,000 annually for corporate tax prep, bookkeeping upgrades, and state filing fees. Include $1,500-3,000 for conversion costs (legal, state fees, new EIN setup). These fixed costs must be absorbed by tax savings to break even.
4. Apply the profit threshold test. C-Corp conversion typically pays off above $200,000-300,000 in annual retained earnings. Below $150,000 profit, compliance costs usually exceed tax benefits. Between $150,000-250,000, run the numbers both ways — results depend on your state taxes and salary needs.
5. Evaluate non-tax conversion triggers. Convert immediately if you need to raise VC funding (investors require C-Corps), issue stock options to employees, or have multiple investor classes. These operational needs override tax considerations. Also convert if you're planning an acquisition or IPO within 3-5 years.
6. Test the double taxation impact. Calculate tax on distributions using qualified dividend rates (0%, 15%, or 20% depending on income). Add this to your corporate tax rate to find your effective rate on distributed profits. If you need to extract most profits annually, LLC pass-through may remain cheaper despite self-employment tax.