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What is the proper GAAP accounting treatment in converting from an LLC to a C-Corp?

Peter Skalla's Profile

accounting conversion from llc to corp

Here's what my question comes down to.  LLCs pass gains and losses along to their members (at least for tax purposes).  When an LLC converts to a C-Corp, does GAAP say you bring the equity over to the C-corp as common stock (par and apic) based on:

  1. Gross amounts, as though the company had always been a C-corp, with retained earnings being the (previously passed through) losses from the company's inception; -OR-
  2. Net amounts, such that common stock is reflected as the total of all LLC capital accounts on the conversion date; and with a zero retained earnings because the losses have all been passed out of the company to the members.

The company history is basically this (in round numbers):

  1. Started 6/15/2010 with calendar year reporting and $100,000 cash investment
  2. $60,000 losses in 2010
  3. $42,000 losses in 2011 through Nov. 30
  4. Converted to LLC on December 1, 2011

This happened in Colorado, where an LLC can directly convert to a C-corp.  So it's the same legal entity, just with a different corporate form.  Option 1 appeals to me intuitively as presenting a clean picture to investors reflective of the current corporate form.  Tax books would of course look different from GAAP, which they will anyway.  There's a dearth of information on how to do this so any input would be great.  (Or even educated guesses!)>


Larry Brown
Title: CFO
Company: Canvas Systems
(CFO, Canvas Systems ) |

I assume LLC members and C Corp shareholders are identical persons and ownership interests. If so, I don't this would qualify as a business combination under GAAP (under common control) and balance sheet basis would carryover. Thus, common stock would be at par with remaining equity coming over as APIC (to extent of any remaining pre-conversion paid-in capital) and retained earnings (to extent of any pre-conversion retained earnings left). Also, because this would not be a business combination, assume day 1 would need to record deferred tax assets and liabilities with corresponding expense. All of this is an educated guess, however.


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