LLC conversions

This question involves a number of business and legal. There is no “conversion” as such in most states but the business can be run in a LLC form through a number of techniques (see Virginia - VA section 13.1-722.9 for one of the states that allow direct conversion). Even if state law allows simple conversion, there are complex tax issues. The conversion may be treated as a liquidation of the S corporation. When a corporation liquidates, the corporation is treated as if it sold all of its assets, including goodwill, at fair market value to its shareholders. For an S corporation, the corporation will recognize the gain on the deemed sale, which it will pass through to its shareholders. The shareholders will then pay the tax on the gain. In certain situations, the S corporation may, however, also be subject to a double tax, for example, where the S corporation was previously a C corporation and the built-in gains tax applies. The S corporation shareholder may be taxed at higher than capital gain rates. There are alternative methods including leasing the assets to the LLC. A conversion should not be attempted without careful legal and accounting advice.

Can you? Maybe, but with many other complex questions to follow. The simple focus is whether there is a mechanism to alter the legal type of business entity, and that question is very specific to the state law where the company was originally organized, and possibly any jurisdiction where your company does business and is registered as a foreign corporation doing business. Many U.S. states have now adopted laws permitting certain entities to convert to the LLC form.

However, even in those states permitting the conversion, you must be very careful of the state and federal tax consequences of the actual transaction accomplishing the conversion. Also, there are relationships with creditors who have contracted with the prior entity and may be entitled to consent, or withhold consent, to assignment of contract rights to a "new" legal entity. Similar concerns for licensing in a regulated business environment. Other questions are likely, but you now have an example of the potential breadth of this concept.

Not to sound like a broken record here, but this is another area where your planning process should include consultation with tax planning professionals, coordination with your tax accountant, and consultation with your business attorney in your state.

Note: This Answer and any information contained in this answer is not intended to be treated as legal advice; And, this posting does not create an attorney-client relationship or privilege of any kind.

I concur with previous answers. Align yourself with a CPA about tax impact and get a business attorney consultation regarding changing your status. Below is a link about the Secretary of State's Corporation's section. View Avv.com for an attorney in your area.