Moving from a bootstrapped LLC to a venture-backed powerhouse is a rite of passage for some SaaS founders. However, many entrepreneurs treat the LLC to C-Corp conversion as a simple administrative “name change.”
In reality, if you don’t follow a professional roadmap, you risk paying double legal fees, missing critical tax elections, or—worst of all—scaring off investors during due diligence.
At Optimist Legal, we help tech founders navigate this transition correctly the first time. Here is the step-by-step “exit strategy” for your LLC.
Why Investors Demand a Delaware C-Corp.
If you want to raise venture capital, you are likely facing a legal bottleneck if you remain an LLC. Investors prioritize Delaware C-Corps for what we call the “Chancery Advantage.”
Delaware is a predictability haven. With over 200 years of case law, the Delaware Court of Chancery uses expert judges—not juries—to resolve business disputes. This creates a “playbook” that VCs have seen 10,000 times before.
4 Key Reasons to Convert:
(1) Predictable Law: VCs can model their risk because they know exactly how Delaware courts rule on equity disputes.
(2) Liability Protection: Delaware offers the gold standard of protection for directors and officers, making it easier to recruit high-level board members.
(3) Stock Flexibility: You cannot effectively issue Preferred Stock in an LLC. C-Corps allow for the specific voting rights and liquidation preferences VCs require.
(4) Preferred Stock in an LLC. C-Corps allow for the specific voting rights and liquidation preferences VCs require.
(5) QSBS Tax Savings: Under IRS Section 1202, you can potentially exclude up to $10 million (or more) of capital gains from federal taxes. This is only available for C-Corp stock.
The Step-by-Step Statutory Conversion Process
Converting your entity “evolves” your business DNA rather than just starting a new company. Here is how the Statutory Conversion works in three phases.
Phase 1: The Internal Foundation
Before filing with the state, you must ensure your internal team is aligned:
– Unanimous Written Consent: Every member of your LLC must agree to the conversion in writing.
– The Plan of Conversion: This document outlines exactly how the old LLC units will transform into corporate shares.
Phase 2: The State Filings
This is the “point of no return” where your entity type officially changes:
– Articles of Conversion (Home State): You must notify your current state (e.g., TX, CA, or NY) that the LLC is converting.
– Certificate of Conversion (Delaware): This links your LLC’s history to your new Delaware entity.
– Certificate of Incorporation: This defines your authorized shares (typically starting with 10,000,000) and creates your C-Corp in the eyes of the law.
Phase 3: The Compliance Trap (Foreign Registration)
If your office is in Austin but you are now a Delaware Corp, you are technically a “foreign” entity in Texas. You must file a Foreign Registration Statement with your Secretary of State.
The Risk: Skipping this can lead to massive fines and the loss of your “limited liability” protection, meaning you could be held personally liable for company debts.
Building Your “Investor-Ready” House
Once the entity exists, you must populate it with the documents that sophisticated investors expect to see during due diligence:
– Bylaws: The internal manual for how you hold board meetings and appoint officers.
– Restricted Stock Purchase Agreements (RSPAs): This is where your four-year vesting schedule lives. VCs won’t cut a check if the founders aren’t on a vesting schedule.
– PIIAs (Proprietary Inventions Assignment Agreement): This ensures the C-Corp actually owns the code and intellectual property. Without these, you don’t have a product to sell. Without these, you don’t own your product.
⚠️ The 30-Day 83(b) Deadline
This is the most critical move a founder can make. You have exactly 30 days from the date your stock is issued to file an 83(b) Election with the IRS. If you miss this, you could be taxed on the “growth” value of your shares as they vest, even if you haven’t sold a single share.
Frequently Asked Questions (FAQ)
How long does an LLC to C-Corp conversion take? Typically, the legal drafting takes 1–2 weeks, while state processing in Delaware takes 48–72 hours.
What is the cost of converting to a Delaware C-Corp? Legal fees generally start around $5,000, with state filing fees ranging between $800 and $1,200.
Can I keep my existing EIN? In most statutory conversions, you can retain your original EIN, but you must notify the IRS of the change in entity classification.
What Does a Professional Conversion Cost?
While “DIY” templates exist, the cost of fixing a mistake during a fundraise is exponentially higher than doing it right the first time.
-Legal Fees: Expect to invest around $5,000 for comprehensive document preparation and filing.
– State Filing Fees: Usually range up to $1,200 depending on your home state.
Clean legal documents signal to investors that you are a serious founder. It speeds up the investment process because there is nothing for the VC’s lawyers to “untangle.”
Ready to Scale Your SaaS Business?
Don’t let technical debt at the foundational level stall your Series A. At Optimist Legal, we specialize in helping SaaS founders navigate Business Formation, M&A Transactions, and Fundraising Support.
Schedule a consultation with Optimist Legal today to ensure your conversion is handled with precision.