How to Change a Corporation to an LLC Without Dissolving the Corporation

By Tom Speranza, J.D.

How to Change a Corporation to an LLC Without Dissolving the Corporation

By Tom Speranza, J.D.

If you operate your business as a corporation, you may have heard that a limited liability company (LLC) is a better way to organize your enterprise. Although both entity types can protect your personal assets from business creditors and business-related legal claims, many entrepreneurs prefer LLCs because they have fewer governance requirements and greater flexibility in their structure. An LLC also more easily qualifies for pass-through taxation and can even be a disregarded entity for tax purposes if it has a single owner.

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If you, either alone or with other shareholders, currently own a corporation, there are two ways to convert the company into an LLC without dissolving the original corporation.

Statutory Conversion

A statutory conversion means all the LLC's assets and liabilities can automatically be transferred to a corporation, without having to formally create the corporation and dissolve the LLC. Most states offer what's known as entity conversion as part of their corporation and LLC statutes.

Corporation and New LLC Formed in the Same State

If your corporation and the new LLC form in the same state, you're not actually establishing a second company. Therefore, the state's conversion law does not require you to dissolve the corporation. Follow these steps to convert a corporation into an LLC in the same state:

  1. File a Certificate of Conversion with the state agency that has jurisdiction over businesses in your state, usually the Secretary of State. The Certificate of Conversion describes the old entity (the corporation) and the new entity you want (an LLC).
  2. Attach the Articles of Organization for the new LLC as an exhibit to the Certificate of Conversion.

Corporation and New LLC Formed in Different States

If you convert a corporation formed in one state into an LLC formed in a second state, the conversion requires dissolving the original corporation. After filing a Certificate of Conversion and Articles of Organization in the state where you are forming the new LLC, you need to dissolve the corporation in its formation state by filing of a Certificate of Dissolution with the state agency that regulates businesses.

A big advantage of using the conversion process is that all assets and liabilities of the corporation automatically transfer to the new LLC without the need to create or sign transfer documentation like deeds, assignments, and bills of sale.

Statutory Merger

If your state's laws do not provide for an entity conversion process, you can change your corporation into an LLC through a merger by following these steps:

  1. Create the entity that will survive the merger (the new LLC) by filing Articles of Organization with the Secretary of State or equivalent state office.
  2. File a Certificate of Merger with the Secretary of State stating that the corporation will merge into the LLC, with the LLC emerging as the surviving entity.
  3. If your corporation was formed in a different state than the new LLC, you must file a Certificate of Merger in the corporation's home state to notify it of the transaction.

Like a statutory conversion, a merger automatically transfers all assets and liabilities to the surviving entity without the need for transfer documents or a formal dissolution, but you should review the corporation's contracts, such as its office lease, loan documents, software licenses, and vendor agreements, to determine whether the other party must provide its consent to the merger. If a contract requires consent, ask the other party to provide a letter granting such consent.

Consulting Your Lawyer and Accountant

Any change from a corporation to an LLC—whether accomplished through conversion or merger—raises various legal, financial, and tax issues. To cite a few examples:

  • Your new LLC may need an operating agreement to replace the corporation's bylaws and shareholders' agreement.
  • Any business licenses issued in the name of the corporation must be modified to reflect the new LLC.
  • If the business is changing from being taxed as a corporation to being taxed as a partnership, you may need to divide your current fiscal year into two different tax years and make adjustments to prior and future tax deductions.

You should fully understand all of the legal compliance, tax, and financial issues that arise from the conversion or merger of your corporation before starting either process. An experienced corporate or tax lawyer along with your company's accountant can help you weigh the pros and cons of converting from one entity type to another.

This portion of the site is for informational purposes only. The content is not legal advice. The statements and opinions are the expression of author, not LegalZoom, and have not been evaluated by LegalZoom for accuracy, completeness, or changes in the law.