How to Change a Corporation to an LLC Without Dissolving the Corporation
The conventional procedure is cumbersome and slow if you wish to convert your corporation into an LLC. However, there is an easier, less expensive option in many states.
The shareholders of a corporation occasionally debate converting the corporation to a limited liability company, albeit this may not always happen. Shareholders might determine that such a change in the corporate structure is advantageous for a variety of reasons.
Corporation vs. LLC
An LLC name must include LLC or another similar indicator that it is a limited liability company, but a corporate name must include “Inc.” or “Incorporated” or some other signifier that the firm is a corporation. The two organizations, however, differ from one another in more ways than just how their names are spelled.
Avoiding double taxes is a popular justification for converting a company to an LLC. Due to the fact that a corporation’s income is taxed twice – once in its own hands and once in the hands of its shareholders’ it is subject to double taxation.
An LLC, on the other hand, offers pass-through taxation; as a pass-through business, it doesn’t pay taxes on the revenue it receives (unless it chooses to be taxed as a corporation). Instead, this revenue “passed through” to its constituents, who then must pay taxes on it.
There are more factors that could make the LLC form of organizational structure more advantageous than the incorporated one. For starters, an LLC offers a more adaptable management structure that your corporation’s stockholders may find attractive. Additionally, profits do not have to be allocated in accordance with ownership stakes.
Corporations must also adhere to stricter compliance rules, such as holding yearly meetings and maintaining accurate meeting minutes.
Changing from Corporation to LLC – the Traditional Route
Although converting a corporation to an LLC is not impossible, the conventional process can be time-consuming and costly because it calls for the formation of a new LLC first, followed by the transfer of the corporation’s assets and liabilities to the new LLC, the exchange of shareholder shares for LLC memberships, and finally the dissolution of the corporation.
Fortunately, converting a company to an LLC can be doable without going through this more difficult process. Review S Corp vs. LLC as well.
Taking a More Streamlined Approach, If Your State Allows
Is it feasible to change your corporation into an LLC if you think doing so would be beneficial without dissolving the corporation first?
Many states offer a business entity changeover procedure that is both simpler and less expensive than the standard approach. You do not have to disband your corporation in order to turn your corporation to an LLC using this conversion process.
Instead, the corporation is changed into an LLC rather than you creating one. Additionally, the new LLC receives an immediate transfer of all corporation assets and liabilities.
Nevertheless, some states do not provide this quicker conversion procedure. You must consult the organization in charge of corporations in the state where your corporation was established.
You might learn from your investigation that your state offers a merger procedure rather than a conversion procedure. Although a merger process is less difficult than the conventional method of converting your corporation to an LLC – for instance, it will automatically transfer your corporation’s assets and liabilities to the new LLC – you will still be dealing with two distinct entities: the new LLC you must first form and the corporation, which you must then dissolve once the process is complete.
Unfortunately, you will have to follow the more formal, more expensive process that entails a number of formal steps, including the dissolution of your corporation, if the state in which your corporation was formed does not offer a business entity conversion process and you still want to convert your corporation to an LLC.
Following the Right Steps for Conversion
Because each state that offers a business entity conversion process will have different requirements, it’s impossible to cover everything you’ll need to do in this article; however, in general, you’ll most likely need to do the following:
Plan of Conversion
Most, but not all, states that allow for conversion require you to create a conversion plan. The contents of such a plan will differ depending on your state, so check the requirements if such a plan is required. Some states may also require the plan to be approved by the corporation’s board of directors before it is presented to the shareholders for approval. You must follow whatever steps regarding the conversion plan are required by your state’s laws.
Approval
If a conversion plan is required, it must be approved by a majority of the corporation shareholders. If a plan is not required, then the conversion must be approved by a majority of shareholders; for example, state laws may require shareholders to approve a resolution of the board of directors to convert the corporation to an LLC. If the articles of incorporation or corporate bylaws require a specific majority for any vote, that majority must be approved.
Filing of Required Documents
You may be required to file other documents, such as articles of organization for the new LLC and/or a certificate of formation for the LLC, in addition to the filing of a conversion document or form, known by various names such as certificate of conversion, articles of conversion, and statement of conversion. The filing fees for the conversion process vary by state as well. When you convert your corporation to an LLC using your state’s business entity conversion process, the assets and liabilities of the corporation are automatically transferred to the LLC.
Tax Consequences
While most states provide this more simplified conversion process, which allows you to convert your corporation to an LLC without having to go through the formal steps of dissolving it, you should be aware that the tax consequences of changing your business structure from a corporation to an LLC can be extremely complicated and potentially quite onerous, regardless of the process you use to convert your corporation. As a result, it is strongly advised that you consult with a qualified tax advisor before converting your corporation to an LLC.