If you’re thinking of converting the legal form of your small business from a corporation to a Rhode Island LLC, you should be aware of some basic facts regarding the state’s business-entity conversion process. 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.
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 Rhode Island 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 Rhode Island’s business-entity conversion statute as it applies to closely-held, for-profit Rhode Island corporations converting to multi-member LLCs.
Rhode Island’s Conversion Statute
In Rhode Island, 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 Rhode Island’s conversion statute, your business in its converted form is “deemed to be the same entity as the corporation.” The conversion procedure is codified primarily in Section 7-1.2-1008 of the Rhode Island General Laws (R.I. Gen. Laws).
To convert your Rhode Island corporation to a Rhode Island LLC, you need to:
- have your corporation’s board of directors adopt a resolution authorizing the conversion
- get the corporation’s shareholders to approve the resolution; and
- file a certificate of conversion and articles of organization with the Secretary of State.
Compared to many other states, Rhode Island’s approach to a corporation’s approval of a conversion is a little unusual. For example, in Rhode Island, the resolution authorizing the conversion only needs to specify what type of business entity your corporation will be converted into (namely, a limited liability company). By contrast, other states often require a so-called “plan of conversion” that must include, among other things, the terms and conditions of the conversion. Also, Rhode Island requires that all outstanding shares of corporation stock, both voting and non-voting, vote in favor of the conversion in order for it to be approved. In many other states, a lesser vote, such as a simple majority of voting shares, is all that is required for approval. Moreover, many states also allow for lesser voting requirements if they are contained in a certificate of incorporation or bylaws. For more information, check R.I. Gen. Laws § 7-1.2-1008(b).
The certificate of conversion will contain basic information about the conversion, including:
- the legal form of your business before conversion (business corporation)
- the legal form of your business after conversion (limited liability company)
- the name of your corporation
- the date on which your corporation was created
- the jurisdiction where your corporation was created, and, if that jurisdiction has since changed, the current jurisdiction for your corporation (Rhode Island)
- a statement that the conversion has been properly approved according to corporation documents or by applicable law and the articles of incorporation
- the effective date for the conversion; and
- one or more authorized signatures.
A blank certificate of conversion form is available for download from the Secretary of State.
The articles of organization for your new LLC will include information such as:
- the name of your new LLC
- the name and Rhode Island street address of the LLC’s resident agent
- an indication of how the LLC should be treated for federal tax purposes
- the address of the LLC’s principal office
- optionally, statements regarding the LLC’s purpose and duration
- an indication of whether the LLC will be managed by its members or by managers
- if the LLC will be manager-managed, the names and addresses of the managers
- the effective date of the articles, if other than the filing date; and
- an authorized signature.
For your convenience, the Secretary of State publishes a blank articles of organization form.
The conversion resolution, certificate of conversion, and articles of organization all may appear straightforward. However, keep in mind that 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 $150, which covers the cost for filing the certificate of conversion and the articles of organization.
Finally, be aware that Rhode Island’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 the rights of creditors against your business continue unimpaired, and any legal actions against your business “remain vested in” the new LLC. For more information, check R.I. Gen. Laws § 7-1.2-1008(h).
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.
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, see Nolo’s 50-State Guide to Converting a Corporation to an LLC.