Conversion of Corporation to LLC
Conversion of corporation to LLC refers to converting you corporation to a limited liability company and the processes and methods related to that.4 min read
2. Variable Elements of Conversion
3. Types of Conversion: Statutory Conversion
4. Types of Conversion: Statutory Merger
5. Types of Conversion: Nonstatutory Conversion
Conversion of corporation to LLC refers to converting you corporation to a limited liability company and the processes and methods related to that. Such a process may be necessary or desirable when the aims of your business changes or when you wish for different taxation and you do not want to start a brand new business. If such is the case, you will then have to make a filing with your Secretary of State's office to enact the change.
Is Conversion the Same in Every State?
No. The conversion process is different for every state, and this difference also depends on the kind of conversion that is occurring. Such conversions can range in difficulty, with the most difficult requiring the owners to form a new LLC, transfer their assets to the new one from the old one, and then have the old one dissolved. Your Secretary of State's website should have the conversion steps necessary for each conversion type.
Variable Elements of Conversion
In order to understand conversion, you must understand that there are many kinds of conversions, just as there are many kinds of corporations and tax statuses. These are:
- Corporation types: C corporations, S corporations, domestic corporations (formed in-state), and foreign corporations (formed out-of-state).
- LLC types: single member or multi-member.
- LLCs tax statuses: corporations (C and S), partnerships, and disregarded entities.
- Conversion methods: statutory conversions, statutory mergers, and nonstatutory conversions.
Because of all these variables, there are numerous possibilities for conversion processes. For example, a statutory conversion of an S corporation into an LLC with partnership taxation will be fundamentally different from a nonstatutory conversion of a C corporation into an LLC with disregarded entity taxation. For this reason, one should not make assumptions about the processes but research them thoroughly before undertaking them.
Types of Conversion: Statutory Conversion
Statutory conversion is a streamlined procedure that can be undertaken in many states and which lets you convert a corporation into an LLC by completing and filing a small number of forms with your Secretary of State. Although each state has its own rules for statutory conversion, some basic steps include:
- Having the directors of the corporation approve the conversion and ready a plan for it.
- Having the directors recommend the conversion plan for approval to the stockholders.
- Having a majority of the corporation’s stockholders give voting approval for the conversion.
- Filing a certificate of conversion, an LLC certificate of formation (if necessary), and any other necessary documents with the Secretary of State.
Once these steps are done and the conversion is complete, the result will be that the corporate stockholders will have become LLC members, the corporate liabilities and assets will have become LLC liabilities and assets, and the corporation will have ceased to exist.
Additionally, it should be noted that all these conversion processes happen automatically through operation of the law and not from individual, formal agreements or filings to the Secretary of State.
This type of conversion is known for being the fastest, least expensive manner of conversion. Generally, this conversion form is the best one to pursue, if available.
Types of Conversion: Statutory Merger
Statutory merger is a more complex form of conversion than statutory conversion. If statutory conversion is not available in your state, this conversion is most likely the one you will use. The basic steps for this kind of conversion include:
- Forming a new LLC, which will make the corporate stockholders LLC members as well.
- Having the stockholders approve the merger by vote both as stockholders and LLC members.
- Having the stockholders trade in their shares for LLC member rights.
- Filing a certificate of merger as well as any other documents with your Secretary of State.
Similar to statutory conversion, statutory merger transfers the liabilities and assets of your corporation to your LLC automatically. Unlike statutory conversion, you must create a new LLC before converting to it from your corporation and also formally convert your corporate shares into membership rights with a merger agreement. Additionally, it is likely that filing a formal dissolution form for your corporation will be required.
Types of Conversion: Nonstatutory Conversion
Nonstatutory conversion tends to be the most expensive and complex means of conversion. To do this, the basic steps include:
- Forming a new LLC.
- Formally transferring your corporate liabilities and assets to your LLC.
- Formally exchanging your corporate shares for LLC membership interests.
- Formally liquidating and dissolving your corporation, which will include filing the necessary documents for dissolution with the Secretary of State.
Unlike statutory conversion and merger, your corporate liabilities and assets will not be automatically transferred to your new LLC. Rather, you will need to make special agreements in order to exchange your corporation’s shares into LLC membership interests and transfer liabilities and assets.
In most cases, you will likely not have to use this method of conversion. However, if you do, expert legal assistance is advised. If you need help with this or any other type of conversion of corporation to LLC, you can post your legal need on UpCounsel’s marketplace. UpCounsel accepts only the top 5 percent of lawyers. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.