Small business owners may inquire as to their ability to convert a corporation to a limited liability company (LLC). A small business attorney at The McGuire Law Firm has drafted the article below to outline some basic issues concerning a corporate conversion. Prior to converting your corporation, it is recommended that you consult with a business attorney and a tax attorney.
Prior to discussing a conversion, it is important to note a few issues. First, there are multiple types of corporations, C corporations and S corporations. Second, you may be working with a corporation that has been formed in Colorado or a corporation that was formed in a different state. Third, an LLC can be taxed as a disregarded entity (schedule C), a partnership or as a corporation; Fourth, there are multi-member LLCs and single member LLCs. The article below will focus on a closely held Colorado corporation converting in to a multi-member LLC.
Under Colorado law a corporation can undergo a statutory conversion and convert from a corporation to a limited liability company. This process transfers the assets and liabilities of a corporation to the LLC. You can use one business, and a separate LLC does not need to be formed. The conversion procedure can be found in the Colorado Revised Statutes. To convert you will need to take the following steps:
– Prepare a plan of conversion and have such plan adopted by the board of directors
– Obtain approval of the shareholders for the conversion
– File Articles of Organization with the CO Secretary of State
– File a statement of conversion with the Co Secretary of State
The plan of conversion should contain information such as: the state where the corporation was formed, the name of the corporation, the fact the business is currently formed as a corporation, the name of the LLC and fact the corporation will be converted to this LLC, the state law under which the LLC will be formed and the terms and conditions of the conversion.
The Colorado statute allows for a simple majority vote to approve the conversion by default, but alternative voting requirement may be in place.
If you convert your corporation to an LLC, you should consider drafting an LLC operating agreement, notifying customers, third parties and creditors, holding the required LLC meetings, using the official LLC name for the business moving forward.
From a tax point of view, converting a C corporation to a limited liability company may have negative consequences and result in a large tax bill to the corporation and potentially to the shareholders. The Internal Revenue Service considers the conversion of a C corporation to an LLC as a liquidation of the corporation of thus gain may be recognized by the corporation and to the shareholders. This is the double taxation you may have heard about as a C corporation because the corporation itself is taxed and the shareholders are taxed. Generally, the tax consequences of converting an S corporation to an LLC are less because an S corporation is a pass through entity and taxed somewhat similarly to an LLC. The tax complications of any entity conversions are likely to be complicated and you should consult a tax attorney or tax professional to discuss these tax implications.
Please contact The McGuire Law Firm to discuss your business issues and questions with a Denver small business attorney or tax attorney.