Limited liability companies, or LLCs, offer liability protection for their members, while avoiding some of the negative tax consequences of corporate structures. It is possible for a business owner to convert a different business structure into an LLC even after the business has been operating for years. Generally, state laws require the converting entity to file paperwork with the state's business registration office.
Limited liability companies are run by members who share in the profits of the business. The members' personal assets are protected by the structure of the LLC because the business is considered a separate legal entity. This is different from a sole proprietorship or partnership in which the owners' personal assets can be seized to pay debts. To preserve this formal division between personal and business assets, the business must register as an LLC with the state's business registration office and meet basic legal requirements.
Any type of business entity can convert to an LLC by filing paperwork required by state law. For example, California requires the existing business entity to file articles of organization to address the conversion and establish the LLC's basic structure, and Florida law requires the converting business to file a certificate of conversion documenting the switch. Articles of organization typically include the name of the business, the name and mailing address of the business's in-state registered agent and the street address of the business office.
Although a converting business may only need to meet relatively simple paperwork requirements to become an LLC, the business's members can choose to create additional documents to further describe their new business relationships. For example, an agreement to convert can detail the conversion itself, such as how the business's assets will be transferred. The members can also create a new operating agreement to detail how the new business will function, including such details as how business decisions will be made. The shareholders or partners of the former business can also sign consent forms or resolutions as proof that the former business elected to convert to the LLC structure.
Conversion and operation as an LLC can have tax consequences. If the conversion is done properly, the LLC may be able to keep the same tax identification number as the former entity, but the Internal Revenue Service can treat the conversion differently if the paperwork is not properly filed. For example, the IRS can treat a corporation's conversion to an LLC as a sale of the corporation, which could trigger taxes if the business has increased in value. The LLC must also decide whether to elect to be treated as an S corporation for tax purposes. If the election is not made, each member reports his portion of the profits on his personal tax return.