Key Takeaways

  • Converting a California S corporation to an LLC can be done via statutory conversion, statutory merger, or nonstatutory conversion, with statutory conversion being the simplest if available.
  • California’s entity conversion laws allow assets, liabilities, and ownership interests to transfer automatically in a statutory conversion.
  • The choice of conversion method affects cost, complexity, and tax consequences—LLCs may offer management flexibility, liability protection, and profit distribution advantages.
  • Tax impacts can be significant: the IRS often treats the process as a liquidation, triggering capital gains taxes.
  • Post-conversion compliance includes updating contracts, tax registrations, licenses, and drafting an LLC operating agreement.
  • Owners should weigh the loss of S corporation benefits, potential capital gains, and future ownership needs before converting.

S Corporation Conversion to LLC

If you want to learn more about S corporation conversion to LLC,  you’ll first want to fully understand the pros and cons of operating an S Corp as well as an LLC. Once you know your responsibilities regarding forming and operating each type of business structure, you’ll be able to better determine which type of business is best for you. Sometimes the decision can be quick, depending on how you want to invest in your company. For example, LLCs allow unlimited shareholders, whereas S Corps allow no more than corporations/">75 shareholders.

Most notably, both S corporations and LLCs offer limited liability for the owners and members. Additionally, both types of business structures are not required to pay taxes at the federal level. Keep in mind though, that sometimes S Corps are taxed on passive income.

If you want to operate a business with ease, meaning that you don’t want to have to deal with a lot of corporate formalities or filing fees, then an LLC is probably the better choice for you. Even if you have already formed an S Corp, you can convert your business structure to an LLC.

In most states, you can easily convert your S Corp to an LLC by filing a document declaring as such. You can also create a brand new LLC and merge your S Corp into the LLC.

Understanding California’s Entity Conversion Rules

In California, the process to convert an S Corporation into an LLC is governed by the state’s entity conversion laws. California law allows for a statutory conversion, which means you can change your entity type without having to dissolve the corporation and start from scratch. This approach automatically transfers all assets, liabilities, and ownership interests from the S Corporation to the new LLC by operation of law.

The general steps for a statutory conversion in California include:

  1. Drafting a Plan of Conversion – This outlines the terms of the conversion, how shares will be exchanged for LLC membership interests, and the effective date.
  2. Board and Shareholder Approval – The corporation’s board of directors must approve the plan, followed by approval from the shareholders (typically a majority vote, though your bylaws may require more).
  3. Filing with the Secretary of State – You must submit the Articles of Organization (Form LLC-1) and a Certificate of Conversion (Form CONV-C) to the California Secretary of State.
  4. Paying Applicable Fees – As of now, California charges a filing fee for both forms, plus an annual $800 franchise tax for the LLC.

Once approved, the S Corporation legally ceases to exist, and your new LLC is recognized as the continuing business entity.

Key Differences Between S Corporations and LLCs in California

While both S corporations and LLCs offer limited liability protection, their structural and operational differences can influence whether a conversion is worthwhile.

  • Management Flexibility – LLCs have fewer formalities than S corporations, which must maintain a board of directors, hold regular meetings, and document decisions. LLC members can manage directly or appoint managers.
  • Ownership Rules – An S corporation is limited to 100 shareholders and must meet specific IRS eligibility rules, whereas an LLC can have unlimited members and a broader range of ownership structures.
  • Profit Distribution – S corporations must allocate profits strictly according to share ownership; LLCs can distribute profits in any manner agreed upon in the operating agreement.
  • Tax Treatment Options – While S corporations have pass-through taxation, LLCs can choose to be taxed as a sole proprietorship, partnership, C corporation, or S corporation, offering more flexibility in planning.

Various Business Structure & Tax Choices

You want to remember that there are a variety of business structures, and several ways in which to have your business taxed. Therefore, if you want to convert your S Corp to an LLC, you will have to determine if you will be operating a single-member or multi-member LLC. Furthermore, even if you choose to operate as an LLC, you can still be taxed as a different type of business, whether it be a partnership or corporation. This is because LLCs are viewed as ‘disregarded entities,’ which means that you will need to choose what other type of business structure you will be taxed as.

Choosing the Right Conversion Method

If you cannot use a statutory conversion (for example, due to unique ownership structures or certain restrictions), California law also permits:

  • Statutory Merger – You form a new LLC and merge the S Corporation into it. Shareholders exchange their stock for LLC membership rights. This process automatically transfers assets and liabilities, but you must separately file dissolution paperwork for the corporation.
  • Nonstatutory Conversion – The most complex method, involving forming a new LLC, manually transferring assets and liabilities, and formally dissolving the corporation. This method is usually only used if required for legal or contractual reasons.

Choosing the right method depends on your company’s current structure, legal obligations, and tax considerations. Statutory conversion is usually the most efficient, but a statutory merger may be preferable if you need additional control over how the transition is handled.

Detailed Steps for a Statutory Conversion in California

California’s statutory conversion process is designed to streamline the shift from an S corporation to an LLC:

  1. Draft a Plan of Conversion – Include terms for exchanging shares for LLC membership interests, the effective date, and any changes to governance.
  2. Board Approval – The board of directors must formally adopt the plan.
  3. Shareholder Vote – California law generally requires approval by a majority of outstanding shares unless corporate bylaws set a higher threshold.
  4. Prepare and File Forms – Submit a Certificate of Conversion (Form CONV-C) and Articles of Organization (Form LLC-1) to the Secretary of State.
  5. Pay State Fees – Include the filing fee for both documents and budget for California’s $800 annual franchise tax for LLCs.
  6. Effective Date – The LLC becomes the legal successor once the Secretary of State accepts the filings, automatically assuming all assets, liabilities, and contracts.

State Laws for Conversion

It will depend on the specific state you are in to determine how to convert your S Corp to an LLC. Different states have the following procedures:

• Some states require that you create a new LLC and subsequently merge your S Corp into that newly created LLC. Thereafter, the LLC is the “survivor” in the merger. Such a merger could be rather complex, and might require legal assistance as there could be rules regarding specific paperwork, transfer of assets, and dissolving of the S Corp.

• Other states simply allow you to convert your S Corp to an LLC by filing a request to convert.

Alternatives When Statutory Conversion Is Not Available

If statutory conversion is not an option due to ownership complexities, contractual restrictions, or state-specific limitations, consider:

  • Statutory Merger – Create a new LLC, draft a merger agreement, and transfer S corporation assets and liabilities by operation of law. Dissolution paperwork for the corporation is filed afterward.
  • Nonstatutory Conversion – Form a new LLC and manually transfer assets, contracts, and licenses. This process often requires renegotiating agreements, retitling property, and may be more costly and time-consuming.

Post-Conversion Compliance in California

After completing the conversion, you must ensure all legal, tax, and operational matters are updated to reflect the LLC structure:

  • Update Contracts and Agreements – Notify banks, landlords, suppliers, and clients of the change in entity type. Some agreements may require formal amendments or consents.
  • Tax Registrations – Update your records with the California Franchise Tax Board and the IRS. Depending on the circumstances, you may need to apply for a new EIN.
  • Business Licenses and Permits – Update local, state, and industry-specific licenses to the new LLC name and structure.
  • Operating Agreement – Draft an LLC operating agreement that defines member rights, profit distribution, and management structure.
  • Annual Filings – File the California Statement of Information for LLCs (Form LLC-12) within 90 days of formation, and pay ongoing annual fees.

Failure to complete these post-conversion steps can cause compliance issues or invalidate certain legal protections.

Reasons for Converting

There are several reasons why you might want to convert your S Corp to an LLC, which including the following:

• **Business reasons. The main business reason why an S Corp might want to convert is due to the enhanced limited liability that LLCs provide. Most states have what are called “charging order” statutes that prevent creditors from reaching all of the profits of the LLC. In this case, the creditor can only obtain the amount of capital that the debtor (member) put into the LLC. Therefore, this conversion is incredibly beneficial for those companies with significant assets.

• **Tax reasons. When an S Corp converts to an LLC, the corporation generally must liquidate its assets before conversion, which means that the S Corp has to pay tax on the gains that are realized after the liquidation. While this would be a tax consequence, it can actually be beneficial for an S Corp that eventually wants to convert to an LLC. Instead of letting the assets grow, which would mean additional gains and higher taxes, the S Corp will want to convert right away to avoid paying higher taxes in the future.  

• **Investing reasons. If an S Corp wants to bring on a new investor, this will cause the S Corp to terminate, thus resulting in tax implications. Therefore, an S Corp will want to convert to an LLC to avoid such tax consequences.

Additional Considerations Before You Convert

While LLCs offer flexibility and potential liability advantages, converting from an S Corporation may not always be the right move. Key considerations include:

  • Tax Implications – The IRS treats the conversion as a liquidation of the corporation, potentially triggering capital gains taxes on appreciated assets. Shareholders may also owe taxes on distributed assets.
  • Loss of S Corporation Benefits – If your S Corporation enjoys certain tax advantages, such as payroll tax savings for owner-employees, those benefits may not carry over to the LLC structure.
  • Ownership Changes – LLC membership interests are more flexible but may complicate future investment or transfer scenarios compared to corporate shares.

Consulting both a business attorney and a tax professional is critical to ensure the conversion is advantageous and properly executed.

Common Pitfalls and How to Avoid Them

Converting an S corporation to an LLC can create legal and operational issues if not managed carefully:

  • Tax Surprises – Failing to account for capital gains or asset appreciation can lead to unexpected tax bills. Consult a tax advisor before setting a conversion date.
  • Contract Clauses – Some agreements contain “change of entity” provisions requiring consent before conversion; overlooking these can trigger defaults.
  • Licensing Gaps – Ensure all state, municipal, and industry licenses are updated promptly to avoid interruptions in operations.
  • Operating Agreement Oversights – Not customizing an LLC’s operating agreement to match business realities can lead to member disputes.

Frequently Asked Questions

  1. Can I convert my California S corporation to an LLC without dissolving it first?
    Yes. A statutory conversion allows you to change the entity type without dissolving the corporation, transferring all assets and liabilities automatically.
  2. Will I need a new EIN after conversion?
    Possibly. Depending on IRS requirements and changes in ownership or structure, you may need to apply for a new Employer Identification Number.
  3. How long does the conversion process take in California?
    If filings are complete and accurate, statutory conversions are often processed within a few weeks, though timelines can vary by state workload.
  4. What taxes will I owe when converting?
    The IRS treats most conversions as a liquidation of the corporation, potentially triggering capital gains taxes on appreciated assets. Consult a tax professional.
  5. Do I need an attorney to handle the conversion?
    While not legally required, professional guidance is recommended to ensure compliance with California law, address tax consequences, and avoid contract or licensing issues.

If you need help converting your S Corporation to an LLC, 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.