If you’re thinking of converting the legal form of your small business from a corporation to an Oregon LLC, you should be aware of some basic facts regarding the state’s business-entity conversion process. 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.
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 Oregon’s business-entity conversion statute as it applies to closely-held, for-profit Oregon corporations converting to multi-member LLCs.
Oregon’s Conversion Statute
In Oregon, 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 60.470 through 60.478 of the Oregon Revised Statutes (O.R.S.).
To convert your Oregon corporation to an Oregon LLC, you need to:
The plan of conversion contains key information about the conversion, and must include:
For the last item, you might simply attach a copy of your new LLC’s articles of organization to the rest of the plan of conversion.
By default, Oregon’s conversion statute requires approval of the plan of conversion by a simple majority of the shareholders in each voting group entitled to vote. However, the statute also allows for the possibility that a greater majority is required by the articles of incorporation or board of directors. More particularly, the statute states that, for conversions, you should use the same approval requirements as apply to mergers. (A merger is legally distinct from a conversion.) For more details, check O.R.S. § § 60.474 and 60.487.
The articles of conversion will contain essentially the same information as the plan of conversion. More specifically, they must include:
Of course, the plan of conversion itself will contain the first two listed items. Also, by including the plan of conversion within the articles of conversion, you will necessarily be including your articles of organization.
The articles of organization for your new LLC will include such things as:
For your convenience, the Secretary of State publishes a blank articles of organization form. (At this time, there is no separate blank form available from the Secretary of State for the articles of conversion.)
The plan of conversion, articles 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. (As the Oregon Secretary of State cautions, “Because there are legal and financial consequences to changing your business type, please consult an attorney or a CPA before making your change.)
Your minimum filing fee for this process likely will be $100, which is the cost for filing the articles of conversion for domestic (Oregon) business entities.
Finally, be aware that Oregon’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,” or your new LLC may be substituted for the corporation as a party in a lawsuit. For more information, check O.R.S. § 60.478.
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.