If you’re thinking of converting the legal form of your small business from a corporation to an Iowa LLC, you should be aware of some basic facts regarding the state’s business-entity conversion process.
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:
- C corporations and S corporations
- for-profit corporations and non-profit corporations
- corporations formed under Iowa law and corporations formed under other states’ laws
- multi-member LLCs and single-member LLCs
- LLCs taxed as partnerships, LLCs taxed as corporations, and LLCs taxed as “disregarded entities;” and
- multiple methods for converting your business—including statutory conversions, statutory mergers, and nonstatutory conversions
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 Iowa’s business-entity conversion statute as it applies to closely-held, for-profit Iowa corporations converting to multi-member LLCs.
Iowa’s Conversion Statute
In Iowa, 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. The conversion procedure is codified primarily in Sections 490.1111 through 490.1114 of the Iowa Code.
To convert your Iowa corporation to an Iowa LLC, you need to:
- have your corporation’s board of directors adopt a plan of conversion
- get the corporation’s shareholders to approve the plan of conversion; and
- file articles of conversion and certificate of organization with the Secretary of State.
The plan of conversion contains key information about the conversion and must include all of the following:
- the name and form of your business before conversion (form = corporation)
- the name and form of your business after conversion (form = limited liability company)
- the “terms and conditions” of the conversion, including the basis for converting corporate shares into LLC membership interests; and
- the certificate of organization and operating agreement for your new LLC.
By default, Iowa’s conversion statute requires approval of the plan of conversion by a simple majority of the shareholders in each share class or voting group entitled to vote. However, the statute also clearly allows for the possibility that a greater vote is required by the articles of incorporation, bylaws, or board of directors. For more details, check Iowa Code § 490.1112.
The articles of conversion contain some of the same information as the plan of conversion, as well as a few other items; more specifically, they must include:
- a statement that your corporation has been converted into another entity
- the name and form of the other entity (limited liability company)
- the jurisdiction of the statute governing the new LLC (Iowa)
- the effective date of the conversion
- a statement that the conversion was approved as required under Iowa Code Chapter 490 (the business corporation code); and
- a statement that the conversion was approved as required under Iowa Code Chapter 489 (the limited liability company act)
At this time, unlike some other states, the Iowa Secretary of State does not provide a blank form or sample articles of conversion.
At a minimum, an Iowa certificate of organization for an LLC must include only the name of the LLC, and the street address of the LLC’s initial registered office and name of initial registered agent. As with the articles of conversion, the Secretary of State does not provide any form for the certificate of organization.
The plan of conversion, articles of conversion, and certificate of organization all may appear straightforward; however, keep in mind that you need to draft all of these documents yourself, as well as prepare an operating agreement as part of the plan of conversion. Moreover, converting your particular business may involve unexpected complications. Therefore, it may be advisable to work with a business attorney to complete the conversion process.
Your minimum filing fee for this process likely will be $55, which includes the cost for filing the articles of conversion ($5) and the certificate of organization ($50).
Finally, be aware that Iowa’s conversion statute states not only that all of your 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 your business may continue “as if the conversion had not occurred.” For more information, check Iowa Code § 490.1114.
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:
- notifying customers, clients, suppliers, and others with whom your business has relationships of its new status as an LLC
- holding required LLC meetings (such as member or manager meetings)
- keeping proper minutes of LLC meetings
- keeping LLC finances separate from personal finances
- using the official LLC name on your business documents; and
- filing the required biennial report with the Secretary of State.
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 advisor.
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.