Key Takeaways

  • Merging an LLC into a corporation involves complex legal and tax considerations and varies by state.
  • You can merge an LLC into a new or existing corporation across state lines by following legal and procedural requirements in both states.
  • Alternatives to merging include domestication, foreign registration, or dissolving and forming a new entity.
  • The IRS typically treats qualifying mergers as tax-free reorganizations under specific conditions.
  • Not all states allow LLC domestication, making merger a viable alternative for out-of-state transitions.
  • When merging an LLC across states, legal counsel is highly recommended to navigate filing requirements and asset/liability transfers.

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.

Merging an LLC from One State to Another

Merging an LLC from one state to another is a strategic way to relocate your business while preserving its operational history, tax ID, and assets. This process is especially helpful when states do not permit LLC domestication or when maintaining a clean legal transition is preferred.

The most common approach is to form a new LLC or corporation in the desired state and merge the old LLC into it. The steps typically include:

  1. Create a Merger Plan – Outline the terms of the merger, including ownership structure, transfer of assets, and liability assumptions.
  2. Form the Receiving Entity – Register a new LLC or corporation in the target state.
  3. Approval – Obtain member approval for the merger according to the operating agreement of the original LLC.
  4. File Articles of Merger – Submit the necessary documents in both states (the original and the destination).
  5. Dissolve the Original LLC (if required) – In some cases, the original LLC is automatically terminated upon filing; in others, you must file dissolution paperwork separately.

Benefits of Merging Across State Lines:

  • Maintains business continuity and contracts
  • Avoids the administrative burden of managing two entities
  • Can preserve EIN and tax elections
  • Simplifies accounting and reporting

Important Considerations:

  • State Requirements: Each state has unique requirements for mergers. Check both the origin and destination states for filing specifics and fees.
  • Legal and Tax Compliance: You'll need to address state tax registration, business licenses, and potentially revise the operating agreement or bylaws of the new entity.
  • Creditors and Contracts: Notify creditors and update contracts to reflect the surviving entity’s jurisdiction and name.

This approach is particularly relevant when you're looking to merge an LLC from one state to another without creating legal ambiguity or managing dual-state compliance burdens.

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.

Comparing Merger vs. Domestication vs. Foreign Qualification

Before deciding to merge an LLC into a corporation, especially across state lines, it's helpful to compare all the available options:

  • Merger: Legally combines two entities into one. The original LLC ceases to exist, and all assets/liabilities are absorbed by the new or surviving entity. This is ideal if you want to consolidate operations in the new state and maintain business continuity.
  • Domestication (Statutory Conversion): Some states allow you to convert your LLC from one state to another. This keeps your LLC legally intact but updates its jurisdiction. Not all states support this option, so it may not be viable.
  • Foreign Qualification: Allows you to operate your existing LLC in another state while keeping it active in its original state. This is best for businesses operating in multiple states or transitioning gradually.

Each option has distinct legal and tax implications. For example, domestication may retain your EIN and tax status, while foreign qualification may lead to double compliance and tax obligations.

Consulting a business attorney can help clarify which strategy is most efficient for your business goals and ensures you meet all filing requirements in both states.

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.

Legal and Administrative Steps When Merging Across States

When merging an LLC into an S corporation across state lines, the administrative burden increases. Each step must align with state-specific corporate and LLC statutes, including:

  • Drafting the Merger Agreement: Clearly specify which entity is surviving, how ownership interests will be exchanged (e.g., LLC membership interests for S corp shares), and address debt assumptions.
  • Filing in Multiple Jurisdictions: Articles of merger must be filed in the LLC's original state and the S corporation’s state of incorporation. This may require different forms and fees.
  • Tax Entity Election: Ensure the resulting corporation continues to meet IRS requirements for S corporation status, including ownership and class of stock rules.
  • Notifications and Licenses: Update business licenses, bank accounts, vendor contracts, and notify taxing authorities of the structural and jurisdictional change.

Pro Tip: If your business holds permits, licenses, or contracts that are jurisdiction-specific, confirm with relevant agencies whether those permissions will transfer to the new entity or require reapplication.

Frequently Asked Questions

  1. Can I move my LLC to another state without forming a new entity?
    Not always. Some states allow domestication, which lets you move your LLC without forming a new one. If not available, a merger or dissolution may be necessary.
  2. Is merging an LLC into a corporation taxable?
    Often, no. If the merger qualifies as a tax-free reorganization and ownership continuity rules are met, the IRS generally treats it as non-taxable. Consult a tax advisor for your specific case.
  3. How long does it take to merge an LLC into a corporation across states?
    Timelines vary by state but can range from a few weeks to a couple of months, depending on state processing times and document preparation.
  4. What’s the difference between domestication and merger?
    Domestication moves the same LLC to a new state (where allowed), while a merger forms a new entity that absorbs the old LLC, often used when states don’t allow domestication.
  5. Can I keep the same EIN when merging LLCs across states?
    Yes, in many cases, especially if there's no change in ownership or business structure. However, verify this with the IRS or a tax professional to avoid filing issues.

If you need help with a merger of an LLC into a corporation, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.