We wish to convert our LLC to a corporation and have been advised we need to adopt a legally valid plan of conversion.

First off, California law requires you to adopt a plan of conversion. Section 17540.3 of the California Corporations Code lists all the requirements of a plan of conversion (it must state the terms and conditions of the conversion, explain how the LLC interests will be converted to stock, etc.) You will also need documentation showing that at least a majority of controlling members consent and approve of the conversion.

For the conversion to be effective and recognized in CA, you will need to file a special Articles of Incorporation for the new corporation which makes reference to fact that an entity is being converted.

You definitely need to be aware that by converting from an LLC to a corporation you are going from a single layer of tax to a double layer, unless the corporation makes an S election.

Disclaimer: This does not create an attorney client relationship but simply serves as a general response to a general inquiry. Any tax advice is not intended and cannot be used to avoid any federal tax penalty or to promote, market or recommend and investment plan or arrangement.

To convert a California LLC to a California corporation requires:

1. The LLC members need to adopt a plan of conversion, and the type of plan adopted may have a significant impact on your taxes;

2. The members of the LLC then need to prepare minutes, or an agreement, evidencing their asset to the plan of conversion;

3. Articles of Incorporation that set forth a statement of conversation must be filed with the Secretary of State (original and two copies) along with $150 filing fee and $15 over the counter fee;

4. The new corporation then needs to be fully organized (bylaws, organizational minutes of the directors, s-election of the shareholders to avoid double-tax and retain partnership like taxation, filing a Statement of Information with the Secretary of State, and filing a Notice with the Commissioner of Corporations);

5. DBAs, local tax certificates, etc.. may need to be amended; and

6. The LLC needs to be dissolved and file a final tax return.

The type of conversion plan prepared is ultra important and can have significant tax consequences. The IRS treats an automatic conversion of an LLC to a corporation through the filing of a statement of conversation as if the LLC contributes all its assets and liabilities to the corporation in exchange for stock in the newly formed corporation, then the LLC transfers its interest to the members, and then the LLC liquidates. When this is the sequence of events, the owners of the corporation’s stock may be precluded from using certain deductions and offsets under IRS Code 1244.

REQUIRED IRS CIRCULAR 230 DISCLOSURE: To ensure compliance with requirements imposed by the Internal Revenue Service, we inform you that, to the extent this communication (or any attachment) concerns any tax matter, it was not written to be (and may not be) relied upon to (1) avoid tax-related penalties under the Internal Revenue Code, or (2) promote, market or recommend to another party any transaction or matter addressed herein (or in any such attachment).

Disclaimer. The information provided above is general information, does not constitute specific legal advice, and does not create an attorney client relationship. I am corporate-business, employment and real estate attorney. If you require further legal assistance, please do not hesitate to visit my website - http://www.yourlegalcorner.com - or to contact me directly at 818-849-5206, or by email at: legalcorner@aol.com.