How to Change a Corporation to an LLC

By David Ingram

Corporations may wish to change their form of organization to the limited liability company, or LLC, form for a number of reasons, including to concentrate ownership in the hands of a smaller group and to take advantage of LLCs' unique tax options. However, changing a corporation to an LLC is not as simple as filling out a specific form. A corporation must be fully dissolved, a new LLC formed and all assets transferred to the new company for the transition to be complete.

Step 1

Call a meeting of the board of directors to officially vote to dissolve the corporation, and record the decision in the official minutes of the meeting. Call for a vote of the stockholders after the board makes it decision; more than 50 percent of stockholders must vote to change the corporation to an LLC. Make premium offers to buy shares from stockholders opposed to the change if you have trouble winning a majority vote.

Step 2

File Form 966, Corporate Dissolution or Liquidation, with the IRS within 30 days of reaching the decision to dissolve. Form 966 only requires a half-page of information, but a bit of the information may require some digging, such as identifying the service center where the corporation filed its last tax return.

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Step 3

Notify and pay off all outstanding creditors, or request that your creditors hold the debts and transfer them to the new LLC. Fully explain the transition to your creditors, and assure them that it should flow smoothly in terms of transferring all accounts payable and not missing payment deadlines.

Step 4

Sell all assets that you do not wish to transfer to the new company, and place all other assets in a temporary trust. Distribute all assets to the LLC once it has been formally established.

Step 5

Form your new LLC. First, designate the founding members of the LLC. As a corporation changing to an LLC, the company will be going from a large number of owners to a relatively small group. Members can be majority shareholders of the corporation, members of top management, members of the board of directors, another corporation or any other person of legal age. Draft and file articles of incorporation and an operating agreement, and obtain any licenses required at the state and local level.

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How to Change From a Corporation to a Sole Proprietorship

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How to Transition an LLC to a Corporation

Electing to convert a business from an LLC to a corporation is subject to the laws of the state where the limited liability company was organized. Some states have enacted a conversion statute that streamlines the process for conversion; other states maintain the traditional procedures for conversion, which requires multiple steps to complete the process.

What Happens to Assets in a Sole Proprietorship if it Changes to a Corporation?

A sole proprietorship is a simple way of running a business under the name and personal liability of the owner. The assets in the sole proprietorship business are in the name of the individual sole proprietor. If the owner decides to incorporate his business, he can contribute his sole proprietorship's assets to the new corporation in exchange for shares in the company.

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A corporation is an independent legal entity, separate from its owners, who are known as shareholders. It is this independence that affords the shareholders limited liability for the debts of the company and enables them to easily transfer their shares in the business. But when a corporation decides to cease operations, or dissolve, it must undergo a process to terminate its independent legal status. Corporations are regulated under state law, so the dissolution process can vary. However, there are some general steps that all corporations must take.

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