How to Transition an LLC to a Corporation

By Mike Broemmel

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.

Conversion Statute Process

In states that elect to expedite the conversion process, converting an LLC into a corporation requires the filing of a prescribed standard form. The conversion form is available through the Secretary of State's office, or similar regulatory agency, and typically may be filed in person, by mail or online. The form sets forth the intent of the LLC to convert its organizational structure to that of a corporation. The form typically includes an affirmation to comply with all laws applicable to corporations organized in the state.

Traditional Conversion Process

The traditional conversion process represents a more cumbersome, multi-step procedure. Under the traditional conversion process, owners of an LLC, known as members, must vote to convert the entity. A separate corporation is then formed by filing articles of incorporation with the Secretary of State. The assets and debts of the LLC are conveyed to the new corporation and a certificate of dissolution for the LLC is filed with the Secretary of State.

Ready to start your LLC? Start an LLC Online Now

Immediate Tax Consequences

The immediate tax consequences center on how the Internal Revenue Service addresses the conversion. The IRS utilizes one of three categories when dealing with the conversion of an LLC to a corporation. An assets-over conversion exists when the LLC transfers its assets and liabilities to the corporation in exchange for corporate stock conveyed to the LLC. The LLC then transfers the stock to its individual owners. An assets-up scheme involves the transfer of the LLC's assets and liabilities to its owners who then convey the property and debt to the newly formed corporation. An interests-over conversion involves individual owners of the LLC transferring their respective ownership interest in the LLC to the corporation in exchange for a proportional share of the new corporation's stock.

Long-Term Tax Consequences

The long-term tax consequences associated with a conversion arise from the fact that the IRS applies what is called "pass through" tax liability on the LLC form of business. Here, the profits of an LLC are taxed once, at the level of the individual owners. Conversely, with a corporation structure, profits are taxed at the corporate level and any distribution or dividends paid to individual shareholders also face taxation by the IRS; this tax treatment is commonly referred to as double taxation.

Ready to start your LLC? Start an LLC Online Now
Incorporating Vs. LLC

References

Resources

Related articles

How to Use an LLC for Vehicle Ownership

A limited liability company, or an LLC, is a business structure that protects the owners, or members, from liability for the business' debts, while avoiding some of the formalities and negative tax consequences of a corporation. Since LLCs and other businesses are considered legal entities, they can own vehicles in the same way that an individual owns a vehicle.

How to Create an LLC for Investments

Limited liability companies, or LLCs, are flexible business entity structures that have characteristics of a corporation as well as a partnership. However, each state can impose different requirements to create a LLC, though in most jurisdictions, the formation process is similar. Moreover, most state laws allow you to form a LLC for any legitimate purpose, such as to hold and trade investments.

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

A limited liability company, or LLC, is a form of business association authorized by state statutes. The major advantage of an LLC over a corporation is pass-through federal taxation. The profits of a corporation are taxed twice, first when they are earned by the corporation and again when they are passed to its owners. The profits an LLC are not taxed when they are earned by the company. Converting from a corporation to an LLC without dissolving the corporation requires filing a document, called a Certificate of Conversion, with the state agency responsible for registering business organizations.

LLCs, Corporations, Patents, Attorney Help

Related articles

What Types of Businesses Can Be Converted to an LLC?

All states have either enacted the Uniform Limited Liability Company Act or a law with similar provisions authorizing ...

How to Change an LLC Filing as an S Corp to a Sole Proprietor

A limited liability company, or LLC, is a business structure defined by state law which protects its members from ...

How to Become an LLC Business

The choice of business structure is one of the first and most important business decisions a new owner can make, but ...

LLC Vs. Irrevocable Trust

A limited liability company, or LLC, is a business entity to which property can be gifted and managed. An irrevocable ...

Browse by category
Ready to Begin? GET STARTED