If you’re thinking of converting the legal form of your small business from a corporation to a Kansas 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 Kansas 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 Kansas’s business-entity conversion statute as it applies to closely-held, for-profit Kansas corporations converting to multi-member LLCs.
Kansas’s Conversion Statute
In Kansas, 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 Kansas’s conversion statute, your business is considered to be “the same entity without interruption” as existed before the conversion. The conversion procedure is codified primarily in Sections 17-78-401 through 17-78-406 of the Kansas Statutes (K.S.A.).
To convert your Kansas corporation to a Kansas LLC, you need to:
- have your corporation’s board of directors adopt an agreement of conversion
- get the corporation’s shareholders to approve the agreement of conversion; and
- file a certificate of conversion and articles of organization with the Secretary of State.
The agreement of conversion contains key information about the conversion, including such things as:
- the name and type of your business before conversion (corporation)
- the name and type of your business after conversion (limited liability company)
- the jurisdiction of organization for your new LLC (Kansas)
- the manner of converting corporate shares into LLC membership interests; and
- the other terms and conditions of the conversion.
In addition, the agreement of conversion must contain the proposed articles of organization for your new LLC.
To determine what is necessary to get proper shareholder approval of the agreement of conversion, you should first look to your articles of incorporation and corporation bylaws for rules regarding conversion approval. If there are no such rules, you should then check those same documents for any rules regarding mergers that require shareholder approval—conversions and mergers being two different legal processes. Any such voting rules for mergers contained in your corporate documents should be applied in conjunction with Kansas corporate merger laws as if the conversion were a merger; generally speaking, this apparently means that approval would require a simple majority vote of those shares entitled to vote on a merger. For more details, check K.S.A. §§ 17-78-403 and 17-6701.
The certificate of conversion will contain some of the same information as the agreement of conversion, as well as a few other items. More specifically, it must include:
- your state business entity ID number
- the name, jurisdiction of organization, and type of your business before conversion
- the name, jurisdiction of organization, and type of your business after conversion
- if not effective upon filing, the effective date of the conversion
- a statement that the agreement of conversion was approved in accordance with K.S.A. 2011 Supp. 17-78-401 through 17-78-406; and
- the text of the new LLC’s articles of organization.
For your convenience, a blank certificate of conversion is available for download from the Secretary of State.
The articles of organization for your LLC must include:
- the name of the LLC
- the name and street address of the LLC’s registered agent
- the LLC’s mailing address
- its tax closing month
- the effective date for the document; and
- an authorized signature.
The Secretary of State publishes a blank articles of organization form.
The agreement 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.
Your minimum filing fee for this process likely will be $240, which is the cost for filing the certificate of conversion ($75) and the articles of organization ($165).
As a final point, be aware that Kansas’s conversion statute states not only that all of your corporation’s property, as well as all of its liabilities, are automatically transferred to the new LLC, but also that the name of your new LLC may be substituted for the name of your converted corporation in any pending legal actions. For more information, check K.S.A. § 17-78-406.
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 annual report with the 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.