What is an LLC Conversion?
An LLC conversion is when you change the entity structure of your business without dissolving its operations. You might require a conversion if your business is experiencing growth, or you want to scale down the business.
How you’ll convert to or from an LLC will vary depending on whether you’re involved in a partnership, sole proprietorship, or C-corporation.
Read the rest of this article to learn more about what’s involved with LLC conversions and how a lawyer can assist you with the process.
What’s Involved in a Conversion?
Generally, when you need to undergo a business conversion, you’ll need to follow these steps.
- Draft a plan. This needs to include all your business goals and clarify that there are no issues resulting from previous obligations or asset transfers.
- File a Certificate of Conversion. This document is usually filed in your state and might need to be attached to your entity formation documents.
- File across all affected states. If your business is registered in other states, you’ll have to ensure that you complete filings in all of them.
That said, LLC conversions require their own tasks and documents.
How Do You Convert a C-Corp to an LLC?
There are three ways in which you can transfer a C-corp to an LLC.
Statutory Conversion
In some states, you’ll file for the conversion by submitting an application to the Secretary of State. For this, it’s likely that you’ll require approval from your board of directors, a conversion plan, shareholder approval, and a certificate of conversion.
During the conversion, shareholders will become members or owners in the LLC setup. All assets and liabilities will need to be transferred to the new entity.
Non-Statutory Conversion
This is more complicated than statutory conversion. It includes a formal application to transfer all liabilities and assets to your LLC.
In some states, you might only need to register your LLC and dissolve your C-corp. To dissolve the previous entity, you’ll have to file documents with your Secretary of State. When they approve the documents, your process of conversion will be complete.
However, state rules for this process vary a lot, so you should always ensure you stay compliant with local regulations.
Statutory Merger
This type of conversion involves registering your LLC and voting with your shareholders to combine your stakeholder roles with your LLC membership. All your C-corp shareholders will exchange them for membership rights in the LLC.
When this has been completed, a certificate of merger will be submitted to the Secretary of State. All assets and liabilities will be transferred to the LLC, automatically.
The above methods apply to an S corp too, since it originates from a C corp.
How Do You Convert a Partnership to an LLC?
If you own a partnership that you wish to change into an LLC, the process is usually much simpler. You’ll execute the conversion with the state. Provided that there are no changes in aspects such as how much partners own in percentages, you won’t have any changes to file with the IRS.
You will, however, experience taxation if your company has changed ownership percentages or members have been added or removed.
How Do You Convert a Sole Proprietorship to an LLC?
When converting a sole proprietorship to an LLC, file your Articles of Organization with your state’s filing office. In some states, you’ll be required to create a notice of your LLC entity in the local paper.
You might have to register for a new EIN, such as if there’s more than one owner under your LLC or you want to be taxed as a corporation with one owner.
You’ll also have to change your name, as it should include the words “limited liability company.”
How Do You Convert an LLC into Other Entities?
You might want to convert your LLC to a different business structure. Here’s how to do it, as the process varies for different structures.
LLC to C-Corp
If you wish to convert an LLC into a C-corp, such as to expand your business globally, you’ll have to use one of three methods, depending on the state in which you live.
- Statutory conversion. After getting approval from your members, you’ll sign a document and file a Certificate of Conversion and Certificate of Incorporation with your Secretary of State. Member stocks will be converted to the C-corp.
- Statutory merger. You’ll file Articles of Incorporation with your Secretary of State, gain member approval for the conversion, file a Certificate of Merger with the Secretary of State, transfer assets to the new entity, and dissolve the original LLC with a Certificate of Dissolution.
- Non-statutory conversion. You’ll file Articles of Incorporation with your Secretary of State, get member approval, transfer all member assets and liabilities, and submit a Certificate of Dissolution.
LLC to Partnership
If you’re converting an LLC to a partnership, you’ll need to dissolve the LLC by filing Articles of Dissolution, and create a new partnership agreement. You’ll have to submit tax forms to the IRS.
LLC to Sole Proprietorship
Converting an LLC to a sole proprietorship follows a similar process but with some notable differences. For a voluntary dissolution of the LLC, your members will have to vote on the conversion and you’ll draft an official notice for your internal records.
Other steps include:
- Filing Articles of Dissolution with the secretary of state.
- Notifying all business partners.
- Filing any final tax returns with the IRS.
- Getting relevant licences to run your business as a sole proprietorship.
- Getting a new EIN from the IRS, depending on whether or not you’ll hire employees or need to pay specific taxes related to your industry.
- Registering a DBA (Doing Business As) name, if required by your state. .
- Opening a bank account that ensures you separate personal and business finances.
How Can a Lawyer Help You with an LLC Conversion?
Hiring a lawyer to help you when you want to convert your LLC offers many benefits. These include the following:
- They’ll help you determine if the LLC conversion is beneficial for liability, taxes, and business growth.
- They’ll ensure you remain compliant with all state laws.
- They’ll draft all the documents you require for the conversation to take place.
- They’ll protect you against any potential state, federal, or local tax consequences so you prevent unexpected costs.
- They’ll ensure that all debts, assets, and licenses are properly transferred to the new business entity.
- They’ll review and edit internal documents to ensure they’re legally sound.
- They’ll help you let third parties know about the conversion.
Do you need a lawyer for an LLC conversion?
You should contact a lawyer on ContractsCounsel, an online legal marketplace that connects clients with vetted lawyers. They’ll be able to streamline your LLC conversion to minimize your risks and ensure compliance.
