If you’re thinking of converting the legal form of your small business from a corporation to a Maine 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 Maine’s business-entity conversion statute as it applies to closely-held, for-profit Maine corporations converting to multi-member LLCs.
The first thing to say about Maine’s conversion law is that it is a little bit confusing. Some rules for converting a corporation to an LLC appear under each of two different statutes—the Maine Business Corporation Act and the Maine Limited Liability Company Act. According to the Maine Secretary of State, you can convert your corporation under the authority of either Act—but, depending on which Act you choose, one of the forms you use will be different, as will the filing fee.
Regardless of which Maine statute you use for your corporation-to-LLC conversion, the procedure remains relatively simple, with a key step being the filing of a few basic documents with the Secretary of State. The 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. More generally, your business is considered to be the “same . . . entity without interruption as the” entity that existed before the conversion.
The conversion procedure as it is codified under the Business Corporation Act—which is more likely the more complete and accurate set of conversion rules for this type of conversion—appears primarily in Sections 951 through 958 of Title 13-C of the Maine Revised Statutes (M.R.S.). As it is codified under the Limited Liability Company Act, the procedure appears primarily in M.R.S. Title 31, Sections 1645 through 1650. This article mainly relies on the rules contained in the Business Corporation Act.
To convert your Maine corporation to a Maine LLC, you need to:
The plan of conversion contains key information about the conversion, including such things as:
By default, Maine’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 allows for the possibility that different voting rules are required by the articles of incorporation or board of directors. For more details, check 13-C M.R.S. § 954.
The articles of entity 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 blank articles of entity conversion form is available for download from the Secretary of State. Note that the form includes a space for the effective date of your conversion if other than the filing date. (A different form, known as a “statement of conversion,” is also available from the Secretary of State; according to Secretary of State personnel, this form may be used in place of the articles of entity conversion form, though a different filing fee is involved.)
Under Maine’s law, the articles of organization for an LLC must include:
For your convenience, the Secretary of State publishes a blank articles of organization form.
The plan of conversion, articles of entity 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, 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 $145, which is the cost for filing the articles of entity conversion including the articles of organization. (The filing fee is $175 if you file a statement of conversion rather than articles of entity conversion.)
Finally, be aware that Maine’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 any legal actions against the business may continue “as if the conversion had not occurred.” For more information, check Ind. Code § 23-1-38.5-15.
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 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.