If you’re thinking of converting the legal form of your small business from a corporation to a Missouri 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 Missouri’s business-entity conversion statute as it applies to closely-held, for-profit Missouri corporations converting to multi-member LLCs.
In Missouri, you can use a relatively new, simplified procedure that allows you to convert your business from a corporation to an LLC largely by filing one key document 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. By the same token, there is also no need to dissolve your corporation; instead, under Missouri’s conversion statute, your converted business is “deemed to be the same entity as the corporation.”
While roughly 40 states have business-entity conversion statutes, Missouri’s version is somewhat unusual, for reasons discussed below. The conversion procedure is codified primarily in Section 351-409 of the Missouri Revised Statutes (R.S.Mo.).
To convert your Missouri corporation to a Missouri LLC, you need to:
Under Missouri’s law, the resolution approving the conversion only needs to specify the type of entity into which the corporation will be converted and recommend approval of the conversion to the corporation’s shareholders. This stands in contrast to many other states’ conversion statutes, which require a written plan of conversion containing the terms and conditions of the conversion, including the basis for converting corporate shares into LLC membership interests, and often also the new LLC’s articles of organization and even operating agreement.
Regarding approval of the resolution, the Missouri statute states only that the conversion will be authorized “If all outstanding shares of stock” vote to adopt the resolution. In other words, to some extent the statute appears to require unanimous shareholder consent for a conversion to be approved. However, the statute does not explicitly state what happens if less than “all outstanding shares of stock” vote for approval—for example, if two-thirds of all shares or 99% of all shares vote for approval. Moreover, the statute also makes no explicit allowance for the possibility that, for example, the articles of incorporation require a less-than-unanimous vote in order to approve a conversion. (In many other states’ conversion statutes, there is a default rule that approval of a conversion requires a simple majority of shares in each voting group, but also an allowance for the possibility that a different voting rule is laid out, for example, by board of directors or the articles of incorporation.) For more details, check R.S.Mo. § 351-409(2).
Prior to putting together your certificate of conversion and articles of organization, the Secretary of State apparently requires that you file Form 943 with the Missouri Department of Revenue to request tax clearance for your corporation. In response, you should receive a tax clearance letter, which should then be included with the certificate of conversion and articles of organization that you file with the Secretary of State. Because there is some ambiguity regarding tax clearance letters in relation to conversions as opposed to mergers (which are a different legal process), you should double-check with the Secretary of State before preparing and sending in you Form 943.
The certificate of conversion contains basic information about the conversion; more specifically, it must include:
While a certificate of conversion or similar document is required under most conversion statutes, Missouri is unusual in requiring certificates of conversion to contain an agreement regarding service of process. It is also somewhat unusual to not explicitly require inclusion of articles of organization for the new LLC. However, it does appear that, notwithstanding the lack of explicit requirement, the Secretary of State does require that you include articles of organization. It also appears that Missouri’s Secretary of State website does not provide a sample version or blank form for the certificate of conversion.
The articles of organization contain information about your new LLC, including:
A blank articles of organization form is available for download from the Secretary of State.
Given the somewhat unusual nature of Missouri’s conversion statute, including the potential ambiguity regarding shareholder approval of conversion and the need for tax clearance, as well as the lack of a sample form for the certificate of conversion, you should strongly consider seeking the assistance of a business attorney to draft the required documents and otherwise complete the conversion process.
Missouri has not updated its online list of filing fees since its conversion statute came into effect. However, Secretary of State personnel state that the total filing fee for conversion should be $55.
Finally, be aware that Missouri’s conversion statute states not only that all of your corporation’s property, as well as all of its debts, liabilities, and duties, are automatically transferred to the new LLC, but also that all rights of creditors continue unimpaired, and all legal actions against the corporation “remain vested in” the new LLC. For more information, check R.S.Mo. § 351-409(8).
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.