A limited liability company (LLC) forms under state law by filing articles of organization (sometimes called a certificate of formation) and by drafting an operating agreement signed by the LLC's members that sets forth the terms of the members' relationship with one another and with the company's managers (if the LLC has separate managers).
To modify an LLC, its members must amend the articles of organization and/or the operating agreement (depending on the issue being changed). If the members wish to change the LLC into a different type of entity, such as a corporation or limited partnership, the LLC must file a certificate of conversion. To change the tax treatment of an LLC, members file a form with the U.S. Internal Revenue Service (IRS).
Amendments to Articles of Organization
Most state LLC laws require just a few items of basic information about an LLC in its articles of organization:
- Company name
- Address of its principal place of business (whether inside or outside the state of formation)
- Name and address of its registered agent in the state of formation
- Whether it is member-managed or manager-managed
If an LLC has sophisticated outside investors such as private equity funds, the articles might include a detailed description of its capital structure. In most cases, the articles of organization are a simple document.
If an LLC wishes to change its name, registered agent, management structure, or any other information contained in its articles of organization, members must:
- File a certificate of amendment describing the changes
- Pay the state's required filing fee
If the LLC's operating agreement requires a member or manager vote to approve changes to the articles, those votes must take place before filing the certificate of amendment.
Amendments to Operating Agreement
An LLC's operating agreement contains all the details about how it conducts and manages its business, including:
- Names of the LLC's members
- The LLC's capital structure (the kinds of membership interests it can issue and how their rights and obligations differ)
- Who manages the LLC
- How members and managers vote and approve company actions
- Restrictions on the transfer of membership interests
- How the LLC deals with the death or disability of members
- How to allocate profits and distribute cash
- Procedures for the company's termination and dissolution
If an LLC's members wish to make changes to the operating agreement, the members must:
- Draft an amendment to the operating agreement (or have the company's counsel prepare the document)
- Approve the amendment by the vote required in the existing operating agreement
- Sign the amendment
If the changes to the operating agreement are extensive, the company should consider amending and restating the operating agreement so that all the modifications appear in a single document.
Converting an LLC to Another Entity
Most states allow LLCs to convert into other types of business entities, such as corporations or limited partnerships. Some states that permit conversions even allow existing LLCs that have formed in other states to convert into corporations or partnerships in the conversion state.
To convert into a different entity type, an LLC files a certificate of conversion accompanied by a formation document for the converted entity—articles of incorporation or a certificate of limited partnership.
An LLC that converts to a corporation needs a set of bylaws and stock certificates and must elect a board of directors and appoint officers.
An LLC that converts to a limited partnership needs to form a general partnership entity and draft a partnership agreement signed by the general partner and the limited partners.
If the LLC changes states as part of the conversion, the existing LLC must formally dissolve in the original formation state.
Change of Tax Treatment
Most LLCs are taxed as partnerships for purposes of federal and state income tax, meaning that the LLC does not pay tax as an entity but instead allocates its profits to the members, who pay taxes with their individual tax returns. However, an LLC can also elect to be taxed as a C corporation, S corporation, or disregarded entity (if it has only one member).
If an LLC wishes to change the initial tax treatment it elected, it files an Entity Classification Election (Form 8832) with the IRS. Modifying an LLC's tax election raises complicated tax and legal issues, and an LLC should not change its tax treatment without first consulting its accountant.
Modifications to an LLC can be relatively simple or very complex, depending on the circumstances. If you run your business as an LLC, consulting the company's lawyer and accountant before making changes can protect you from unintended legal and tax consequences.
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