Changing a corporation to an LLC is a big decision to make because it affects a business’s tax obligations, management structure, and the aspects of compliance needed.
It is common to see business owners choose this transition due to the increased flexibility and reduced administrative burden, in addition to the tax benefits it provides.
Though this might seem like an appealing prospect, it differs from state to state and can be challenging if legal or tax issues aren’t taken into account while planning.
In this article, we discuss the most important things to keep in mind and the steps you would take to change your corporation to an LLC.
Why Change from a Corporation to an LLC?
Before you initiate the switch, one thing you must do is know why you would want to change from a corporation to an LLC. Many businesses choose to make this shift for the benefits of financing, taxes, and operational ease.
Although corporations have the advantage of legal protection as well as smooth capital raising through stock issuance, they suffer from compliance burdens and double tax payments.
Corporate businesses face severe challenges and after addressing these issues, changing to an LLC seems to be a troublesome issue.
Benefits of Switching Corporation to an LLC
Pass-Through Taxation: LLCs don’t have to deal with a tax burden at the corporate level and the individual level like many corporations do when they have shareholders. LLC finances are directly tied to its owners, meaning profits or losses will be taxed at the individual level.
Simplified Compliance: Due to the need to hold annual meetings and keep records, corporations have extensive legal requirements. On the other hand, LLCs tend to have fewer formalities and compliance restrictions.
Flexible Management Structure: LLCs allow owners of the business to manage it without any restrictions, instead of a board of directors.
Limited Liability Protection: LLCs provide owners with personal asset protection against any business debts and liabilities, much like corporations do.
Easier Profit Distribution: LLCs operate with more flexibility about profits so profits can be distributed differently to different members of the company. This isn’t possible in corporations where profits can only be given based on shares owned.
Drawbacks of Switching Corporation to an LLC
Tax Implications: The IRS may classify the liquidation event as a taxable event if the conversion is seen as a trigger of capital gains tax for the shareholders.
State Legal Fees and Additional Legal Requirements: Some states process conversion charges, and other legal additional work may be needed for the movement of assets and business licenses.
Loss of Corporate Privileges: Corporations have an easier time offering stock options and bringing on new investors. An LLC might restrict the business’s capacity to raise funds by way of issuing shares.
Steps for Changing a Corporation to an LLC
Step 1: Research State-Specific Conversion Rules
Different states have different stipulations for entity conversions. Many states accept a straightforward statutory conversion, while some others require the formation of a new LLC and then the dissolution of the existing corporation.
Statutory Conversion: Delaware, Nevada, and Ohio permits corporations to change into LLCs through the filing of a Certificate of Conversion as long they pay the required fee.
Statutory Merger: This is done by forming an LLC and merging the corporation into the newly formed LLC.
Non-Statutory Conversion: In states without direct conversion methods, an LLC needs to be formed, the assets transferred, and the corporation subsequently dissolved.
Step 2: Obtain Shareholder and Board Approval
In terms of changing the business entity structure, the shareholder’s and the board of directors’ approval will be needed.
Check the corporation’s bylaws and article of incorporation to know if there are any specific voting threshold requirements to make this change. Usually, a two-thirds majority is needed for the conversion to be accepted.
Step 3: File the Necessary Paperwork
You might have to submit numerous papers to the state department based on the state you are in. Some common ones are:
Conversion Certificate: The document that officially turns the corporation to an LLC.
Organization Articles: Required for the formal formation of an LLC.
Dissolution paper (if applicable): Should the corporation be taken apart to set up the LLC, the papers for that will need to be drawn up.
Operating Agreement: Not every state requires it but an operating agreement is crucial in capturing the management hierarchy and member roles within the LLC.
Step 4: Transition of Assets and Liabilities
Transferring the assets and liabilities from the corporation to the new LLC will have to be done manually for states that do not allow statutory conversion. This generally comprises of:
- Business contract assignments.
- Transferring ownership of various assets; intellectual property, real estate, etc.
- Informing vendors, customers, and suppliers about the change of entity.
Step 5: Update Tax and Business Registrations
After finishing the conversion, make sure to tell the IRS and other relevant offices of the change in business structure:
File for a new EIN (If applicable): An EIN may not be necessary for all LLCs, but it is sometimes required by the IRS.
Modify state and local licenses: Make sure your business complies with all state and local regulations.
Update the IRS: If needed, submit US tax form 8832 to inform the IRS of how an LLC will be taxed (as a sole proprietorship, partnership, or corporation).
Change registration for payroll taxes: You will have to amend your payroll tax accounts if you have employees working in your business with federal and state agencies.
Step 6: Close the Corporation (if Required)
If the conversion method involves dissolving the corporation, use a formal dissolution process that normally entails:
- Submission of Articles of Dissolution with relevant state.
- Discharge all assets under the corporate name including debts and other obligations.
- Distribution of remaining assets to shareholders under beneficial conditions.
- Informing your creditors, suppliers, and other business partners of the dissolution.
Step 7: Inform Stakeholders and Revise Business Operations
Once the conversion is completed, make sure to inform employees, vendors, and customers of the change. Contractual agreements, invoices, and banking accounts should all comply with the name of the business entity.
How EasyFiling Can Assist
Changing a corporation to an LLC can be an overwhelming task and it requires a lot of legal and tax aspects.
EasyFiling eases the transition process by taking care of the paperwork to meet state compliances and processes and then walking you through every stage. Our professional staff can help you with:
- Filing the appropriate documents of conversion to your state.
- Drafting an operating agreement customized for your business.
- Tax compliance and assisting you with IRS issues.
- Smoothly changing licenses, EINs, and business registration.
Why Choose EasyFiling?
Guidance on Filing: We have a dedicated team that focuses only on business formation and conversion, ensuring that there are no errors in the process.
No Stress Process: You do not have to worry about paperwork or legal issues. You can concentrate on your business.
State Knowledge: Each state has its own set of rules. We ensure that your conversion is compliant with the state rules.
Better Value Pricing: There is no hidden fee. At EasyFiling, we make business conversion simple and affordable.
Now, you do not have to worry about the legal processes involved in an LLC conversion. Reach out to us today and we will take care of everything so that you can put your focus on running your business.
Conclusion
Switching from a corporation to an LLC offers many advantages such as tax savings, less administrative work, and more flexibility in how the business is run.
Like with any significant change, proper preparation will aid in addressing any legal or tax issues. Seeking professional help is also necessary to determine the specific conditions of your state.
As we have seen above, it is very possible to change a corporation into an LLC while remaining within the rules and regulations and without interrupting the business operations.
FAQs About Converting a Corporation to an LLC
1. Will I require a different EIN for my LLC?
A new EIN is usually necessary. The Internal Revenue Service typically issues new EINs for changed business organization types, but there are exceptions.
2. I want to change from an LLC, what tax repercussions will I face?
Potential capital gains taxes might be evoked. The IRS will likely see that as a taxable liquidation event. It would be smart to get the advice of a tax specialist.
3. Is it possible to do a statutory conversion in any state?
No, some states do not allow this conversion and they will likely make it more difficult in the form of having to dissolve the corporation and start a new LLC.
4. How long does the conversion process take?
The timeline varies by state, typically ranging from a few weeks to a few months, depending on filing requirements and state processing times.
5. Can I keep my business name after conversion?
Generally, yes, but you must check with your state’s business registry to ensure the name remains available under the new LLC structure.
Nabin Adhikari
