How to Merge an LLC Into an S-Corporation

By Jeffry Olson, J.D.

How to Merge an LLC Into an S-Corporation

By Jeffry Olson, J.D.

Merging a limited liability company (LLC) into an S corporation can be complicated, and it has significant tax implications. Prior to merging, the parties must consult with a tax expert to determine the tax consequences of the merger. Merging with an S corporation effectively eliminates the existence of the LLC, and it requires meetings, consultations, and paperwork.

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1. Decide the terms of the merger.

The parties to the merger must agree to the terms of the merger. The negotiation takes place between the owners of the LLC and the owners of the S corporation, often with the assistance of attorneys. Essential components of the merger include the valuation of the two companies, any transfer of assets, and the merger's effective date.

This process is much simpler when the same parties own both entities. Regardless, there must be an agreement before the merger can proceed.

2. Draft the merger agreement.

After the parties agree to the terms of the merger, they draft a merger agreement. Most states require a written merger agreement between the two companies. Even if your state does not require a written agreement, it is best to use one to avoid confusion and any future disputes, including possible litigation.

Submit the merger agreement to the manager of the LLC and the president of the S corporation for approval. It is advisable for the company owners to sign the agreement as well.

Take all reasonable steps to avoid future litigation. Obtaining written consent when everything is agreeable at the beginning of the merger is much easier than seeking agreement after conflict exists. If all parties cannot agree to the terms of the merger from the beginning, it might be a good idea to reconsider the project.

3. Transfer assets.

After the merger of the LLC into the S corporation, transfer all assets and debts of the LLC into the name of the S corporation. Issue any appropriate stock in the S corporation to the members of the LLC. This is all done in compliance with the terms of the merger agreement. Further, investigate your state's requirements for completing the merger. This may include filing a certificate of merger with the Secretary of State or filing a dissolution of the LLC.

4. Submit tax forms.

Consult with a tax professional as soon as possible once the LLC has been merged into the LLC into the S corporation. If the parties have done their research, the conversation should not bring about any surprises. Complete any required documentation with the Internal Revenue Service and state tax agency to comply with all laws going forward.

After an LLC merges into an S corporation, the LLC will no longer exist. The companies merge pursuant to the terms of the merger agreement, and the assets and debts of the LLC transfer to the S corporation. Merging in some states requires filing a certificate of merger or a dissolution of the LLC. To prevent any problems going forward, the new company must fill out and submit all necessary tax forms.

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