Can I Convert a Corporation Into an LLC? If So, How?

Last updated on: August 8, 2021

When planning a business, many entrepreneurs choose between forming an LLC or a corporation, as both of these business structures are very popular. This is one of the most crucial decisions in the fate of your future business. It will determine its tax status, management structure, ongoing requirements, and more. 

If you want to change a corporation into a limited liability company during your business operation, you should do it properly.

In this article, we will discuss the features of an LLC and a corporation, as well as their strengths and weaknesses. Furthermore, we will cover the process of converting a corporation into an LLC and the online companies, which can help with this.

Corporation vs LLC

What Is a Corporation?

A corporation is a formal business entity based on shared ownership and separation of management responsibilities from the owners. It is the only type of business entity that can issue the stock for the company’s shares distribution.

The main advantages of a corporation include the following:

  • Universal legislation: While the rules governing LLCs may vary from state to state, the law regarding corporations is uniform;
  • Attractiveness to investors: Most venture capitalists prefer to invest in corporations rather than LLCs, which by default are “pass-through” tax units;
  • Extensive jurisprudence: Since the legislation regarding corporations is unified, a great number of court cases have been established during the existence of this type of company. Due to this, when you go to court, you can have an idea of which decision to expect.

Few aspiring entrepreneurs decide to start a corporation instead of an LLC or Sole Proprietor because this type of enterprise is more formalized. A corporation has more structural requirements. Besides, it requires more paperwork and regular meetings for directors and shareholders.

What Is an LLC?

A limited liability company (LLC) is a formal business structure created by one or more participants to generate income on a systematic basis.

An LLC is considered to be a hybrid legal structure because it has features of other types of businesses. 

The similarity with sole proprietorships and general partnerships is explained by the fact that the IRS treats LLCs as “pass-through” tax units. The company does not pay federal taxes, leaving that responsibility to the owners who report business income and expenses on personal 1040 tax returns and/or Schedule C. However, the owners have the right to change their tax treatment to corporate by filing a request with the IRS.

On the other hand, the principle of limited liability of the owners is similar to that of an LLC. This is one of the main reasons for launching an LLC, because, in the case of a legal dispute, creditors cannot claim the owners’ personal assets, for example, a house, savings, a car, etc. At the same time, we should remember that such protection is valid only if personal property is separated from the LLC’s assets.

In comparison to corporations, however, LLC formation is cheaper and requires fewer documents. Additionally, this business structure offers tax and structural flexibility, hence LLCs are more popular.

How To Convert a Corporation Into an LLC?

The need to convert a corporation to an LLC may arise for a variety of reasons. The most common ones are the following:

  • The desire to avoid double taxation. C corporation profits are taxed both at the company level as a whole and during their distribution between the owners;
  • Choosing an LLC allows you to reduce the tax burden and distribute money in a more efficient way;
  • An LLC gives great flexibility and a wide range of options for company operation;
  • There is less formality in the LLC business process. Unlike corporations, LLC owners do not need to hold annual meetings and keep their mandatory minutes;
  • Maintaining an LLC and keeping it in good standing with the state is usually cheaper than running a corporation.

Regardless of the reasons that motivated you to make this decision, there are several ways to convert:

  • Statutory conversion;
  • Statutory merger;
  • Nonstatutory conversion.

Let’s take a closer look at them.

1. Statutory Conversion

The easiest, fastest, and relatively new option. Therefore, the statutory conversion is currently used only in 35 states. Depending on the specifics of the law, the process may involve different steps, but the most common are as follows:

  1. The directors of the corporation make the decision to convert;
  2. Drafting a conversion plan and presenting it to the company’s stockholders for approval;
  3. If the decision to convert and the plan have been approved, the next step is to prepare a Certificate of Conversion, which includes information such as:
  • The original corporation’s name;
  • The original jurisdiction of formation for the corporation and the original date of incorporation;
  • The name of the new LLC.
  1. Preparation and filing of the LLC Articles of Organization, which is the main document for the official registration of the LLC;
  2. Meeting the requirements and obtaining the permits necessary to form an LLC in the state of your choice;
  3. Official dissolution of the corporation;
  4. The shareholders of the corporation become members of the LLC. In addition, the assets of the corporation are transferred in the same manner.

2. Statutory Merger

A more complicated method, which is usually used when the corporation is located in a state where Statutory Conversion is not allowed. 

To perform a Statutory Merger, you should follow these sequential steps:

  1. The creation of a new LLC;
  2. The company’s stockholders voting to approve the merger between the existing corporation and the new LLC;
  3. A formal voluntary exchange of shares for LLC ownership rights;
  4. Preparation and filing of the Certificate of Merger with the Secretary of State for the official merger of the companies.

3. Nonstatutory Conversion

The Nonstatutory Conversion method is more complicated than the previous ones. It does not involve an automatic transfer of ownership and assets from the corporation to the LLC, so it is rarely used today.

As with a Statutory Merger, the process begins with launching a new LLC and includes a transfer of ownership, a transfer of assets, and dissolution of the corporation. However, unlike the options listed above, each step of the Nonstatutory Conversion has to be accompanied by a separate exchange agreement. Given that, you will probably need to hire a business attorney who understands state law if you decide to use this method.

Tax Considerations

Converting a C-corporation to a limited liability company allows the owners to enjoy LLC benefits, like:

  • Limited liability;
  • “Pass-through” taxation;
  • Tax flexibility, allowing you to choose how an LLC is taxed, etc.

Nevertheless, in most cases of conversion, there can be significant tax expenses. This is primarily due to double taxation, which means that tax is paid first by the owners (when distributing the funds) and then, by the corporation (when selling the assets). An exception can be made for corporations that meet the following criteria:

  • No built-in gain or appreciation of assets;
  • Having significant net operating losses (“NOLs”), which offset gains on its distribution of assets during liquidation.

Usually, in a conversion of a corporation, the tax expense is reduced if the LLC for taxes will be treated as a corporation rather than a partnership. The IRS has two options for handling such a conversion:

  • As a direct exchange of shares for LLC interests;
  • As a tax-free reorganization.

Pay attention to the fact that the type of conversion does not affect the LLC tax forms to be filed in the future.

As for the conversion of an S-corporation, this process has some differences compared to a C-corporation. S-corporations do not pay federal taxes on their own behalf leaving that responsibility to the shareholders, which limits the impact of the conversion. 

There are a number of tax implications associated with a conversion, so you should be careful when making your decision. Consult with an experienced attorney or accountant who can answer questions about the specifics of an LLC and taxes in your state.

Need Help To Convert Your Corporation Into an LLC?

As a business owner, you probably have a lot on your plate. If you don’t want to waste your time and energy to convert your corporation into an LLC, you can entrust it to professionals.

An experienced attorney can take control of the conversion process, but these services are expensive. Depending on their experience and location, the prices can reach up to several thousand dollars. Taking into account that converting a business also comes with certain expenses, most entrepreneurs prefer to hire a professional online company. As a rule, the cost of their services is affordable even for small businesses, and the quality of the support is quite high.

There are many companies involved in opening an LLC or a corporation, but business conversion services are provided by only a few of them. We have prepared below a list of three online services that are at the top of the business creation and support industry:

  • LegalZoom: For $229, this experienced business services company will handle your business transformation quickly and smoothly. It has an impressive track record and a solid reputation. In addition, LegalZoom provides its customers with a 100% satisfaction guarantee. This means that if for any reason you are not satisfied with the quality of the service provided, the company will refund the money spent on its purchase;
  • Swyft Filings: The price for the conversion service of a corporation to an LLC is $199. For that money, this online service provider will take care of all the formalities and complete the necessary procedure on your behalf. Once the process is done, Swyft Filings will provide all the company documents by uploading them to your personal online repository;
  • BizFilings: The cost of its business conversion services varies from state to state, but it always takes a reasonable approach. Years of experience and thousands of satisfied clients ensure that there are no impossible tasks for BizFilings. When you hire this company, you will receive prompt and quality service.

Conclusion

If you intend to change your business structure, you need to comply with the law throughout the entire LLC conversion process. Therefore, when planning to convert your corporation into a compliant LLC, you have to carefully study the specifics of the state where you operate. Find out whether statutory conversion or statutory merger is allowed and take care of all the necessary paperwork in advance. Careful preparation and following the rules will not only make the conversion process comfortable but will also help avoid potential legal complications in the future.

If you want to take some responsibilities off your hands, then you can let one of the professional online companies handle the conversion of a corporation into an LLC. BizFilings, Swyft Filings, or LegalZoom, which we covered above, would be great options. Compared to an attorney, any one of them will save you hundreds of dollars, as well as your time. You’ll get a ready-made business without the paperwork and searching for the necessary forms on your own.

Senior Business Tax Writer, etc
Jean Wilson Murray
https://bestllcservices.co/
(323) 789-5289
Senior Business Tax Writer, etc
Jean Wilson Murray

In this IncFile vs ZenBusiness review, we're going to compare two of the most popular LLC formation services based on pricing, features, and drawing out differences and similarities to let you see which is most suitable for you and your business.

You can learn more about @Mike here.

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