What Types of Business Can be Converted to an LLC?
Before going ahead with your plan, it is essential to have a good understanding of the businesses that qualify for conversion into an LLC.3 min read
What types of business can be converted to an LLC? Do you have a business you wish to convert to an LLC? Before going ahead with your plan, it is essential to have a good understanding of the businesses that qualify for conversion into an LLC, the requirements, and the legal and tax implications.
Uniform Limited Liability Company Act
Every state has passed the Uniform Limited Liability Company Act or its local equivalent to allow the creation of limited liability companies. Under these state laws, any legitimate business activity can form an LLC. An LLC is ideal for almost any type of business activity as it offers a high level of flexibility. Forming an LLC requires filing articles of organization with the state government. A business owner enjoys two main benefits by creating an LLC. First, the liability protection an LLC provides is like that of a corporation. Second, tax authorities treat an LLC as a pass-through entity, effectively allowing the LLC owner to avoid double-taxation which owners of a corporation are subject to.
Types of Businesses That Can Convert to an LLC
LLC owners are called members. Individuals, partnerships, corporations, and groups of LLCs can come together to form an LLC, thus becoming its members. All the entities that are legally qualified to form and become members of an LLC can convert into a limited liability company including:
- Sole proprietorships.
- Group of LLCs.
While it is possible for other entities to convert into a limited liability company, organizations such as banks and insurance companies are legally ineligible to convert their business into an LLC. Furthermore, some states restrict the number of legal entities that can form members of an LLC.
The type of legal entity that wants to convert into an LLC determines the conversion process. A sole proprietorship requires filing articles of organization with the agency responsible for business registration in the state where it operates. The shareholders of a corporation must approve the conversion through a majority vote and then file articles of organization to become an LLC. This implies the dissolution of the corporation and its assets and debts collapsed into the LLC. For partnerships, all the partners must agree to the conversion before filing articles of organization. Hence, the debts and assets of the partnership are transferred to the newly created LLC. Note that when a business converts to an LLC, it reduces the tax burden of the owners by allowing them to pay the business tax with their personal income tax.
How to Convert Your Company From One Type to Another
At some point in the life of a company, a different legal structure will be the best for its circumstances. Such situations include when an LLC is trying to raise capital, or a corporation wants to convert into an LLC for tax considerations. The owners of the company can dissolve it and create a new one, but the company will lose its original creation date, cancel all existing contracts, obtain new tax ID, permits, licenses, and other formalities. However, conversion allows the company to change its form of entity without losing existing business structures. In most states, it is possible to convert a corporation to an LLC and vice versa, while a few states only permit conversion to one type of entity. Additionally, conversion may not be possible in some states.
States That Support Conversions
Conversion from LLC to corporation and corporation to LLC is possible in the following states:
Alabama, Arkansas, California, Colorado, Delaware, Florida, Georgia, Hawaii, Iowa, Idaho, Indiana, Kansas, Louisiana, Massachusetts, Maine, Michigan, Minnesota, North Carolina, North Dakota, New Mexico, Nevada, Ohio, Oklahoma, Oregon, Rhode Island, South Carolina, South Dakota, Tennessee, Texas, Utah, Virginia, Washington, Wisconsin, and Wyoming.
The states of Alaska, Kentucky, and West Virginia allow conversion of Corporation to LLC only. States that prohibit conversions include Arizona, Connecticut, District of Columbia, Illinois, Maryland, Missouri, Mississippi, Montana, Nebraska, New Hampshire, New Jersey, New York, Pennsylvania, and Vermont.
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