How to convert an LLC to an S corp or C corp
If your business structure no longer suits the needs of your business, you may want to convert your LLC to an S corp or C corp. While the process varies by state, there are certain steps that apply across the board.
Variables that affect conversion
It's important to remember that LLCs and corporations can have several different tax statuses. Converting an LLC taxed as a partnership to a C corp is very different from converting an LLC taxed as a corporation to an S corp. Before you decide how you’ll be converting, it’s a good idea to discuss your options with a business law attorney.
3 ways to convert an LLC to S corp or C corp
In general, there are three ways to change from an LLC to an S corp or other corporate structure:
Statutory conversion. This streamlined process is only allowed in some states. You’ll file a limited amount of paperwork with the secretary of state and follow a few other procedures. Once your conversion plan is approved, your LLC's assets and liabilities automatically transfer to the new entity. Any LLC members will become stockholders in the new corporation. Your old LLC then simply dissolves, without the need for any formal filings. This is the easiest, most inexpensive method, but it’s not always an option.
Statutory merger. In states where statutory conversion isn't available, this is usually the next best option. You’ll form a new corporate entity, such as an S corp or C corp, and then have the LLC members approve a merger between the old entity and the new one. Members exchange their membership rights for stock shares through a formal merger agreement. In most cases, you will also need to file documents to dissolve your old LLC once the merger is complete.
Nonstatutory merger. This is the most complex way to convert an LLC to an S corp or C corp. Unlike the statutory processes, once the new corporation is formed, you must file documents to transfer assets and liabilities, as well as to exchange membership rights for stock, before formally liquidating your LLC. Since nonstatutory mergers are so complex, getting a corporate law attorney’s advice should usually be your first step.
Creating a new corporation
There are several steps related to creating a new corporation that’ll you’ll need to take before you start the conversion process. This includes filing the articles of incorporation with the secretary of state, and possibly an additional form informing the state of your intent to convert. You’ll also have to write corporate by-laws, elect officers, and issue stock.
In most cases, you’ll also be required to get a new employer identification number. It’s also a good idea to ensure that any existing financial arrangement affecting the old LLC (such as business contracts, equipment and property leases, bank loans and documents, professional insurance policies, and business licenses) won't be voided when you convert from an LLC to an S corp or C corp.
This covers the process for converting the legal status of your LLC to an S corp or C corp, but if you’re also changing the tax status of the new corporation, you may also need to file certain forms with the IRS. An attorney familiar with tax and business law can help determine what you need.