The choice of business structure is one of the first and most important business decisions a new owner can make, but the decision is not set in stone. If you are running an existing business as a sole proprietor, partnership or corporation, you may choose to convert the business into a limited liability company. An LLC is a hybrid business structure, providing the limited liability features of a corporation while maintaining the ease and flexible management style of a sole proprietorship or partnership.
Sole Proprietorship and Partnership Conversion
If your business is operating as a sole proprietorship or partnership, you may convert it to an LLC with the consent of the owners. In most states, you do not need to register sole proprietorships or partnerships with the state because these businesses are not independent entities that exist separately from the owners. If the owners agree to change the business entity type to an LLC, you'll need to register the company with the state by filing articles of organization with your state's business registrar, or similar official. By converting to an LLC, the owners will no longer be personally liable for the future debts of the business.
If your business is already organized as an independent entity, such as a corporation, you may convert the business into an LLC if your state has a conversion statute. Many, but not all, states have conversion statutes that provide a relatively simple process for changing from a corporation to an LLC. The statute may provide that, after filing for conversion, all prior obligations and property of the corporation are transferred to the LLC -- all prior lawsuits or proceedings against the corporation will continue against the LLC as if the conversion did not occur. Generally, a conversion from a corporation to an LLC will lessen the tax obligations for the company, but the IRS will likely treat the conversion as a taxable event for the shareholders.
If there is no conversion statute in your state, you must first dissolve the corporation and reform it as an LLC to convert your corporation into an LLC . The shareholders must agree to close the corporation and liquidate the corporation's assets to make distributions to the shareholders. After the corporation is dissolved, you must file articles of organization with the state business registrar to set up the business as an LLC, which will be considered a new business, as opposed to a converted business.
Employer Identification Number
If your business already has an Employer Identification Number, or EIN, you may be required to obtain a new number. The IRS does not recognize an LLC as a business entity; instead it requires the company to choose how it wants to be treated for tax purposes. For example, an LLC may elect to be treated as a partnership for tax purposes; thus, if an existing partnership converts to an LLC, it is not required to obtain a new EIN. However, if you dissolve an existing corporation and form a new LLC, you must obtain a new EIN.