Converting an S Corp to an LLC: Everything You Need to Know
Converting an S corp to an LLC can be a simple process, and you have several alternatives. 3 min read
2. Merger Route
3. Entity Conversion
4. C Corp Conversion
5. Membership Stakes
6. Tax Benefits to S Corp Owners
7. Tax Liquidation
Converting an S Corp to an LLC
Converting an S corp to an LLC can be a simple process, and you have several alternatives. If you own an S corp, you can convert the business into an LLC in two key ways:
- Merging with another entity
- Notifying state authorities of the change in status
Switching an S corp to an LLC can be useful because an incorporation limits an LLC’s shareholders and owners. The LLC and S corp are two of the most registered business structures. LLCs are simpler in nature because they require less formalities. For instance, LLCs do not have to keep records and record meetings like corporations do.
Also, LLCs allow unlimited members to participate, while S corps are restricted to 75 members or less. Additionally, S corps are restricted to only a single class of stock. Although LLCs do not offer shares in the same manner as an S corp, owners can have tiered membership interests. Also, non-U.S. citizens and residents can own a piece of an LLC, which is not the case with an S corp.
If you decide to embark on the merger route, you need to register a new LLC via state of incorporation. States vary when it comes to the creation of an LLC. Regardless of where you reside, you can successfully obtain a merger through the following step.
- In most instances, you may register with the secretary of state where you will register the entity. Many states also offer online registration. You may then merge your S corp with the new LLC. Such a merger may require the services of an attorney or business broker. In cases involving large companies, you may need a merger specialist for additional guidance.
After the merger takes place, you need to draft an operating agreement that notes the LLC is the remnant of the merger. You can dissolve the S corp after you have completed the merger, but only if you desire. All assets of the combined entities belong to the LLC alone.
The merger process can be utilized in every state, and it is the sole option if your state does not permit you to convert an S corp into an LLC.
First, you need to call the secretary of state office in your state regarding an S corp conversion to see if authorities would permit it.
Note: Conversion is a more efficient process than the merger process.
You need to complete the appropriate documentation to switch from an S corp to an LLC. You should submit the documents to the secretary of state, including any registration fees. After, your S corp should be an LLC.
C Corp Conversion
When it comes to converting a Ccorp into an LLC, the reasons are fairly obvious. First, LLCs do not pay business income taxes like C-corps do. However, both entities offer liability safeguards, protecting the personal assets of members and shareholders.
Membership interests are protected by what’s called charging order statutes. Such statues restrict what a creditor can receive. For instance, creditors get the charge against the interests of the member. In other words, the membership interests would go to the creditor, but the creditor does not get voting rights or management power.
Note: Charge-orders are a vital benefit for businesses that hold valuable assets.
Tax Benefits to S Corp Owners
S corp owners may want to switch over due to tax reasons. Further, the shareholders may plan to liquidate a corporation in the future. As the business amasses assets while depreciating assets, the future taxes on the liquidation keeps growing. Therefore, the shareholder may wish to liquidate before the tax balance grows larger.
Also, the shareholders may wish to usher in other investors. If an investor is an entity, for instance, its participation may cause the termination of the business. This is because other entities cannot own S corps, but an LLC permits other companies to own a piece of an LLC.
- S corp termination could cause tax ramifications.
Since S corp shareholders must pay taxes on corporate liquidations, the conversion of an S corp into an LLC would be a wise move. S corp liquidations would cause capital gain taxes. Also, since LLCs cannot participate in the ownership of an S corp, switching shares over to an LLC would dissolve the S corp.
To learn more about converting an S corp to an LLC, post your legal need to our UpCounsel marketplace. UpCounsel’s lawyers have graduated from the best law schools in the nation and will help you find the right course of action if you need to turn your S corp into an LLC. Also, they will ensure that you do not make any mistakes if you must liquidate corporate assets as you transition into an LLC entity.