If you’re thinking of converting the legal form of your small business from a corporation to a Georgia LLC, you should be aware of some basic facts regarding the state’s business-entity conversion process. Because the tax consequences associated with converting from a corporation to an LLC can be complicated, you should consult with an experienced tax adviser.
Variable Elements of Conversions
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 Georgia’s business-entity conversion statute as it applies to closely-held, for-profit Georgia corporations converting to multi-member LLCs.
Georgia’s Conversion Statute
In Georgia, you can use a relatively new, simplified procedure that allows you to convert your business from a corporation to an LLC largely by filing a few basic documents with the Secretary of State. 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. By the same token, there is also no need to dissolve your corporation. Instead, under Georgia’s conversion statute, there is a “continuation of the existence” of your business in the new form of an LLC. The conversion procedure is codified primarily in Sections 14-2-1109.1 and 14-11-212 of the Georgia Code (O.C.G.A.).
To convert your Georgia corporation to a Georgia LLC, you need to:
The plan of conversion contains key information about the conversion, including such things as:
The Georgia conversion statute requires approval of the plan of conversion by “all of the shareholders.” Unlike many other states, the statute makes no allowance for the possibility that a different voting requirement is authorized, for example, under the articles of incorporation. For more details, check O.G.C.A. § 14-2-1109.1(d)(2).
The certificate of conversion contains some of the same basic information as the plan of conversion, as well as a few other items. More specifically, it should include:
In addition, as the next-to-last listed point indicates, a copy of the articles of organization must be filed with the certificate of conversion. At this time, unlike some other states, the Georgia Secretary of State does not provide a blank form or sample certificate of conversion. Instead, the Secretary of State requires that you draft your own certificate of conversion.
Under Georgia’s law, the only required information in the articles of organization is the name of the LLC; the name must comply with basic LLC naming rules. Any other information, such as a statement that management of the LLC is vested in managers, is optional. The Secretary of State publishes a guidance document on forming an LLC that includes sample articles of organization.
The plan of conversion, certificate of conversion, and articles of organization all may appear straightforward. However, keep in mind that you also need to prepare an operating agreement as part of the plan of conversion. Moreover, converting your particular business may involve unexpected complications. Therefore—and as the Secretary of State urges in its own guidance—you should strongly consider working with a business attorney to draft the required documents and otherwise complete the conversion process.
Your total filing fees for this process likely will be at least $95. According to personnel at the Secretary of State, this amount should cover filing of both the articles of conversion and the articles of organization. Additional fees, such as for LLC name reservation ($25), may also be necessary.
Georgia’s conversion statute states not only that all of the corporation’s property, as well as all of its debts, liabilities, and other obligations, are automatically transferred to the new LLC, but also that any legal actions against the business may continue just as if no conversion had occurred, and all creditors’ rights with respect to the business continue unimpaired. For more information, check O.G.C.A. § 14-11-22(c).
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.
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 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.