How to Convert an LLC into a Corporation
Provided by HG.org
When the owner or partners in a limited liability company feel the need to convert the LLC into a corporation, there are various factors that must be considered. The most important is the nature and purpose behind the company, and what is needed to move forward may rely upon a change in current and future business needs.
When an LLC has exhausted its fullest potential for growing without a change, it may be time to convert it into a corporation. This may be necessary due to the max limit of shareholders, a cap on shares, interest or stock or similar circumstances. For the company to move forward with a greater growth or increase in revenue, it may be time to research what is required for the conversion. The processes usually involve several legal and tax issues, and hiring a lawyer to help with the change is recommended by business experts. The owner or partners must also determine which type of corporation is wanted and what may be possible.
In order to change the company, there are three factors that are most important. The owner, partners or co-owners need to understand the tax status currently in effect. These may be through a corporation, partnership or disregarded entity as an LLC. A choice of conversion methods is possible with three options in usual circumstances. Then, after everything has been started, it is time to setup the new corporation. Usually, this is accomplished through a C-Corporation only. When everything has been finalized, the partners may have a new role with the current and preceding shareholders having more power than they previously held.
The Tax Status
When the LLC was first formed, the owner or partners elected a taxation status. This defines how taxes affect the company, and this may need to change if the conversion does not support the current status. This usually means that the taxation must be changed to accommodate the C-corporation. If the LLC is already taxed as a corporation, then this may be kept with the changeover. However, if it is through a partnership or as a disregarded entity, then there may be additional steps. As a default, any LLC that has more than one owner is taxed as a partnership. Single owner LLCs are usually disregarded entities. However, the owner or multimember LLC may have been initiated with another status.
The Conversion Methods
There are three primary methods used for conversion of an LLC to a corporation. The newest manner of doing so is the statutory conversion. It is usually easier, but not every state in the country provides this method. There are certain forms that must be filled out through the Secretary of State. A conversion plan usually must be drafted and approved by all LLC members. When the conversion commences, the LLC members become stockholders. All assets and liabilities then transfer over to the new business entity. With no formal assignment agreements needed, this process is usually least expensive and quick and easy.
Statutory and Nonstatutory Methods
The statutory merger is the formal process with a new corporation merging into the current LLC through filing a certificate of merger with the local Secretary of State. This procedure causes the LLC membership interests to be exchanged for stock when the corporation is formed similar to a statutory conversion. The owners then have votes and are able to approve transactions as LLC members and then shareholders of the C-corporation. The LLC is then dissolved. This method is more complex and has more steps than the conversion process. It may also be more expensive with more energy expended. However, if the state does not have the conversion option, this may be the best route available.
Nonstatutory conversion is the most complicated of the three processes. With this method, all interests, assets and liabilities are formally assigned from the LLC to the corporation that is formed. This is through legal agreements specific to this process. Because this procedure is the most difficult, a legal representative is suggested for the entire duration of this conversion. Once one of the three methods has been chosen, setting up the corporation is next. At that point, a lawyer should be hired to ensure all the correct processes and documentation are connected to the corporation and filed with the appropriate officials.
Corporation Conversion Legal Help
Most of the processes in converting the LLC are accomplished through paperwork. A lawyer should be available throughout the processes, and he or she may need to assist in legal business transactions.
Read more on this legal issueUnderstanding the Differences Between Corporations, LLC's, and Partnerships
Incorporation Assistance from a Business Lawyer
Limited Liability Company Formation
Deciding between an LLC and a C Corporation
Converting an LLC to a C Corporation
Can Closely Held Businesses Have an Advisory Board?
Importance of Maintaining a Business’ LLC or Corporate Status
Questions to Pose for Your LLC Agreement
Overview of Various Business Structures
Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer.