The limited liability company (LLC) and corporation are both formal business entities with plenty of their own advantages and disadvantages.
When you’re first forming your business, one or the other might seem like the right fit, but as your business grows and matures, you may realize that the other entity type would better suit your company.
This raises an important question. If you initially choose the corporation entity type, can you convert that corporation into an LLC down the line? And if so, what does this process look like?
Quick Note: If you’d rather simply dissolve your corporation and form a new LLC, there are plenty of online LLC services (like ZenBusiness) that can take care of the paperwork for you.
First off, let’s quickly outline what an LLC is. A limited liability company mixes elements of sole proprietorships, general partnerships, and corporations, essentially giving entrepreneurs the best of these worlds.
LLCs are typically taxed similarly to sole proprietorships and general partnerships, in that the owners include any company profits or losses into their personal returns — the LLC itself does not owe income taxes. An LLC may also elect to be taxed like a corporation, although this is not a very common option.
There are similarities to corporations too, especially when it comes to financial responsibilities. In an LLC, the owners or members are not usually personally accountable for the financial status of the business. This means that if someone sues your LLC, your personal assets are not at risk.
In short, LLCs are so popular because they provide a variety of legal protections for your business, while also enhancing your company’s credibility.
A corporation is another type of formal business entity, with the crucial distinction that it is the only entity type in America that is allowed to issue stock. The corporation’s stockholders own a portion of the company’s net worth, essentially making those stockholders the owners of the corporation.
Unlike an LLC, corporations aren’t as flexible when it comes to taxation, and they also have much more rigid managerial structures that owners must adhere to. Furthermore, corporations are required to keep extensive records, hold regular meetings for both their directors and their shareholders, and take detailed notes from each of these meetings. An LLC has none of these responsibilities.
In addition to the ability to issue stock, corporations have some other advantages over the LLC as well. One of these advantages is the corporation’s ability to attract investments in the form of venture capital. Venture capitalists hardly ever invest in pass-through entities of any kind, so if you’re seeking VC investments, the corporation is a vastly superior entity type compared to the LLC.
The other advantages of a corporation center around the fact that it is far more established in the courts. The corporation as an entity has been around for centuries, and therefore court systems have had plenty of time to establish precedent regarding how they’ll be treated.
In addition, the corporation has the same structure in every state, whereas all 50 states have their own version of the LLC. These are advantages because, when it comes to court cases, certainty is always preferred over uncertainty — if there are no consistent, established rules, it’s harder to abide by them in a compliant manner.
First and foremost, yes, you can convert a corporation into an LLC. As for how you can do this, there are two main options. The simpler option is to perform a statutory conversion, which is a fairly recent development in the American business landscape, and is still only allowed in 35 states.
This process has some variance from state to state, but in general, it starts with the corporation’s directors agreeing to convert to an LLC and drafting a conversion plan. Then, those directors need to provide the company’s stockholders with the plan so they can vote on it. If the majority of these stockholders vote in approval of the conversion plan, the corporation may then file a certificate of conversion.
They will also need to prepare and file the articles of organization, which is the document used to form an LLC with the Secretary of State, along with completing any other relevant requirements in that state. Finally, you’ll need to formally dissolve your corporation. If you complete all of these steps, your corporation’s stockholders will now be member/owners of your LLC. In addition, the assets held by your corporation will transfer to your LLC.
If your business operates in a state where statutory conversions are not allowed, then you’ll have to perform a statutory merger, which is a considerably more complex method than a statutory conversion. This option begins with the formation of a brand-new LLC, followed by a stockholder vote to approve a merger between the existing corporation and the new LLC.
Then, the stockholders need to voluntarily (and formally) trade in their shares in your corporation for ownership rights with the new LLC. Finally, you’ll need to draft and file a document usually called a certificate of merger with your Secretary of State to officially merge the two companies.
The big difference between a statutory merger and a statutory conversion is the fact that you have to create the new LLC as a distinct business structure before you can begin transferring assets or ownership rights, and you’ll also need to draft a merger agreement document to be able to exchange those corporate stocks for LLC ownership rights. Long story short, the statutory merger is a more time-consuming process than a statutory conversion.
Finally, there is one other way to convert a corporation into an LLC, which is the nonstatutory conversion. This is a much more complex method than either a statutory conversion or a statutory merger, because your assets and ownership do not convert automatically from your corporation to your LLC.
We won’t go into too much detail about the nonstatutory conversion process because hardly anyone actually needs to use it these days, but in short, it starts with forming a new LLC, much like the statutory merger does. The other steps are fairly similar as well: there’s a transfer of assets, a transfer of ownership, and a dissolution of the corporation.
As we noted though, while these steps are automatic transfers with a statutory merger, that isn’t the case with a nonstatutory conversion. Each step requires a separate exchange agreement, which can be rather complicated to draw up. Nonstatutory conversions should not be handled with the DIY route, and you should almost certainly hire a lawyer if you need to use this method. Fortunately, it’s rarely a necessity anymore.
If this process sounds like more of a hassle than you’re willing to take on, or if you would rather have the peace of mind that each step was completed correctly by a professional, you do have some options. You could hire a business attorney to convert your corporation into an LLC, although this is an extremely expensive route that could see your expenses climb into the thousands of dollars.
Another option is to hire a business services company. While there aren’t nearly as many options as there are for forming an LLC or corporation, there are still several reputable companies offering business conversion services.
While it’s not always the simplest process in the world, it is certainly possible to convert your corporation into an LLC. Depending on which state your business operates in, you will either use the statutory conversion or the statutory merger to complete this process.
If you would rather hire someone to take care of the entire process on your behalf, you can hire Swyft Filings, LegalZoom, or BizFilings. These are all reputable companies that we wouldn’t hesitate to recommend, and you can trust them to convert your corporation into a compliant LLC with minimal hassle for you.
We hope this article helped you enhance your understanding of how the corporation-to-LLC conversion process works!
Disclaimer: The content on this page is for information purposes only and does not constitute legal, tax, or accounting advice. If you have specific questions about any of these topics, seek the counsel of a licensed professional.
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