1. Merging an LLC with a Corporation
2. Tax Implications of a Merger Between an LLC and a Corporation
3. Merging an LLC into an S Corporation

Updated November 6, 2020:

A merger of an LLC into a corporation refers to a process whereby a limited liability company (LLC) and a corporation become one company. As a result of the merger, the LLC will cease to exist. The resultant company may be an LLC or corporation and have a different tax or management structure from the original companies. The process of merging an LLC with a corporation is complicated, so it is a good idea to seek the assistance of an experienced lawyer if you intend to undertake such a merger.

Merging an LLC with a Corporation

Under the laws of many states, an LLC and a corporation may be merged into a single business entity. The surviving company can be an LLC or a corporation, as determined by the parties involved in the merger agreement. The agreement must be approved by a certain percentage or number of the corporation's shareholders and directors, and a certain percentage or number of the LLC's members and managers, as outlined in the corporation and LLC's organizational documents or as prescribed by law.

For instance, in Ohio, an agreement for merging a corporation and an LLC must be approved by at least two-thirds of the shareholders of the corporation, unless a lesser percentage is specified in its Articles of Incorporation. The percentage stated in the Articles of Incorporation must not be less than a majority.

If the LLC does not have a manager, the merger must be approved by every member, unless a lesser percentage or number is specified in its Operating Agreement. If an LLC has one or more managers, all the managers are required to approve the merger agreement, unless a lesser percentage or number is stated in the LLC's Operating Agreement.

Tax Implications of a Merger Between an LLC and a Corporation

The tax treatment of a merger between an LLC and a corporation may vary depending on the following factors:

  • Whether the survivor of the merger is the LLC or the corporation
  • Whether the LLC chooses to be a partnership or corporation for federal income tax purposes
  • Whether the corporation was a C corporation or S corporation before the merger
  • Whether the owners of the original companies became the owners of the new entity or were cashed out

If the LLC decides to pay federal income tax as a corporation, the merger will generally be regarded as a tax-free reorganization according to the federal income tax code. If the LLC chooses to be federally taxed as a partnership, the merger will generally be considered a tax-free partnership distribution and subsequently a tax-free contribution of capital to the corporation.

If a corporation is merged into an LLC and the LLC had been paying federal income tax as a corporation, the merger will be regarded as a tax-free reorganization. However, if the LLC had been federally taxed as a partnership, the merger will be treated as if all the corporation's assets had been sold in a taxable manner to its shareholders and then the assets will be considered a capital contribution to the LLC.

Merging an LLC into an S Corporation

A merger between two companies is a complex process. It is recommended that you work with an attorney to prepare a plan for the merger and a merger agreement. The attorney can also help you file the required documents with the state to put the merger into effect.

  • Step 1 – Seek the advice of a lawyer or accountant regarding the merging of the LLC into an S corporation. If the members of the LLC are not the same as the shareholders of the S corporation, each set of owners should be represented by their own lawyer or accountant to prevent a conflict of interest.
  • Step 2 – Prepare aa href="https://iveybusinessjournal.com/publication/seven-steps-to-merger-excellence/" target="_blank"> merger plan and negotiate an agreement between the LLC's members and the S corporation's shareholders. The plan should clearly state the essential aspects of the merger, including the valuation of the companies, permissible business operations before the merger, and the transfer of assets.
  • Step 3 – Get your lawyer to review the merger plan and draft a merger agreement.
  • Step 4 – Transfer the assets of the LLC into the S corporation's name and prepare the necessary documents to show that the S corporation has assumed the debts and other obligations of the LLC. You also need to issue the required shares of the S corporation to the LLC's members to indicate their ownership interest.

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