If you’re thinking of converting the legal form of your small business from a Connecticut corporation to a Connecticut LLC, you should be aware of some basic facts regarding the state’s business-entity conversion process.
First, let’s be clear that there is not just one kind of corporation, one tax status for an LLC, or one kind of conversion. On the contrary, there are:
We won’t be looking at every possible combination of these variables. Instead, we’ll try to keep matters as simple as possible, focusing mainly on the general rules of Connecticut’s business-entity conversion statute as it applies to closely-held, for-profit Connecticut corporations converting to multi-member LLCs.
In Connecticut, you can use a relatively new, simplified procedure that allows you to convert your business from a corporation to an LLC. Under the new procedure, your main task is to file a few basic documents with the Secretary of the State (SOTS). This procedure, technically known as statutory conversion, automatically transfers your corporation’s assets and liabilities to the new LLC. Unlike other methods of conversion, only one business entity is involved: You do not need to separately form an LLC before the conversion can occur. The conversion procedure is codified primarily in Sections 34-600 through 34-608 and 34-631 through 34-636 of the Connecticut General Statutes (Conn. Gen. Stat.).
To convert your Connecticut corporation to a Connecticut LLC, you need to:
You must record and keep your plan of conversion. The plan of conversion must contain:
By default, Connecticut’s conversion statute requires approval of the plan of conversion by a majority of the shareholders in each voting group entitled to vote separately on the plan. However, this requirement may be superceded by a provision in your certificate of incorporation, or a requirement by the board of directors, for a larger majority vote of the shareholders. For more details, check Conn. Gen. Stat. § 33-817.
The certificate of conversion contains much of the same basic information about the conversion as the plan of conversion, including:
The articles of organization for your new LLC will include:
For your convenience, the SOTS publishes a blank articles of organization form.
The plan of conversion, certificate of conversion, and articles of organization all may appear straightforward. However, converting your particular business may involve unexpected complications. Therefore, it may be advisable to work with a business attorney to draft the required documents and otherwise complete the conversion process.
All of your corporation’s property and liabilities are automatically transferred to the new LLC. In addition, be aware that the name of your new LLC can be substituted for that of your former in any pending action or proceeding—such as lawsuits brought against your business.
Apart from the foregoing steps, you will also need to take care of all the tasks normally associated with creating and running a new LLC, such as:
Following the proper LLC formalities is important for maintaining the limited liability status of your business and ensuring certain potential tax benefits. 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).
One other key step in the conversion process is to make sure that no business contracts or agreements, such as bank documents, leases, licenses, and insurance, will be nullified by your business’s conversion.
A key point to keep in mind is that converting a C corporation to an LLC taxed as a partnership often results in a large tax bill. This is largely because the IRS considers this kind of conversion 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.
Converting a corporation to an LLC that will continue to be taxed as a corporation generally does not have the same degree of adverse tax consequences as when converting to an LLC taxed as a partnership, and may even be largely tax-free. However, as this type of conversion 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.
Converting from an S corporation to an LLC is fundamentally different from converting from 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 conversion are often more limited than conversions from a C corporation.
In general, the tax consequences associated with converting from a corporation to an LLC will be complicated.Therefore, for any kind of corporation-to-LLC conversion, you should consult with an experienced tax adviser.
For further guidance on converting from a corporation to an LLC, check Converting a Corporation or S Corporation to an LLC and 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 information on conversion rules in other states, check Nolo’s 50-State Guide to Converting a Corporation to an LLC.