The process for converting the legal form of your small business from an Alaska corporation to an Alaska LLC is complicated; you should work with an attorney to make sure it is handled properly. Here we can only look at some very general background information.
No Statutory Conversions or Statutory Mergers
There is a distinction between a “conversion” and a “merger,” and more specifically between a “statutory conversion” and a “statutory merger.” Where available, a statutory conversion is generally the cheapest, quickest way to convert a corporation to an LLC—largely because you do not have to form a separate LLC before the conversion can occur. If, however, a statutory conversion is not available, in every state but Alaska you have the option to use a statutory merger to change a small business from corporation to LLC; unlike statutory conversions, statutory mergers do require you to form a separate LLC before you can convert—or, more accurately, merge—your business.
Alaska is the one state that does not allow either statutory conversions or statutory mergers. In Alaska, you will have to use a process widely known as “non-statutory conversion” to change the legal form of your business from corporation to LLC. Because non-statutory conversion is a complicated process, you should seek the assistance of a knowledgeable business attorney.
Variable Elements of Conversions
Keep in mind that there is not just one kind of corporation or one tax status for an LLC. On the contrary, there are:
- C corporations and S corporations
- for-profit corporations and non-profit corporations
- corporations formed under Alaska law and corporations formed under other states’ laws
- multi-member LLCs and single-member LLCs; and
- LLCs taxed as partnerships, LLCs taxed as corporations, and LLCs taxed as “disregarded entities.”
We won’t get into how different possible combinations of these variables can affect the process of conversion, but it is important that you be aware that they exist.
Non-Statutory Conversion: A Very Brief Overview
To convert your Alaska corporation to an Alaska LLC via a non-statutory conversion, you will need to create a new LLC, and then transfer your corporation’s assets, directly or indirectly, to the new LLC.
Creating an LLC is a multi-step process. However, for immediate purposes, the key elements are preparing articles of organization and an operating agreement; the articles of organization will be filed with the Division of Corporations, Business and Professional Licensing. Through these LLC organizational documents, the shareholders of your preexisting corporation will also become the members of your new LLC. For more detailed information on forming an LLC in Alaska, check How to Form an LLC in Alaska.
You can transfer your corporation’s assets to your new LLC through one of several methods, which are popularly known as “assets-up,” “assets-over,” and “interests-over.” Depending on the method you use, assets may be distributed to your corporation’s shareholders before ultimately being transferred to your new LLC. For additional information on each of these methods, see this article in The Tax Adviser, Now Is the Time: Converting a C Corporation to an S Corporation or LLC. Any of the methods is likely to require you to prepare specialized agreements and obtain approvals from corporation shareholders and LLC members. Ultimately, you should work with a business attorney to assist you with the transfer of assets.
Merging a C corporation into an LLC taxed as a partnership often results in a large tax bill. This is largely because the IRS considers this kind of merger to be a liquidation of the corporation for which the corporation will owe tax, on top of which the corporation’s stockholders will also be taxed personally on the corporate assets assumed to be distributed to them; in other words, there is double taxation.
Merging a corporation into an LLC that will continue to be taxed as a corporation generally does not have the same degree of adverse tax consequences as when merging into an LLC taxed as a partnership, and may even be largely tax-free. However, as this type of merger will not change the basic elements of how your business will be taxed going forward, you should investigate closely how it would benefit the business, other than by providing a more flexible management structure. Also, in order for your LLC to continue to be taxed as a corporation, you must file a special election form with the IRS.
Merging an S corporation into an LLC is fundamentally different from a merger involving a C corporation, because an S corporation has only one level of taxation; as a rule, an S corporation itself does not pay tax, only its shareholders do. Therefore, the tax consequences for this type of merger are often more limited than mergers involving a C corporation.
In general, the tax consequences associated with merging your corporation into an LLC will be complicated. Therefore, for any kind of corporation-into-LLC merger, you should consult with an experienced tax adviser.
Additional Reading and Guidance
For further guidance on converting from a corporation to an LLC, check Corporations and S Corporations vs. LLCs. Also, while they are not a substitute for expert tax advice, you should also consider looking at Tax Savvy for Small Business, by Frederick Daily (Nolo), and Legal Guide for Starting & Running a Small Business, by Fred Steingold (Nolo). For a more complete discussion of the steps involved in forming and running an LLC, consult Your Limited Liability Company: An Operating Manual, by Anthony Mancuso (Nolo). And, finally, for information on conversion rules in other states, check Nolo’s 50-State Guide to Converting a Corporation to an LLC.