If you’re thinking of converting the legal form of your small business from a corporation to a Utah 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:
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 Utah’s business-entity conversion statute as it applies to closely-held, for-profit Utah corporations converting to multi-member LLCs.
Utah’s Conversion Statute
In Utah, 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 Department of Commerce. 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 Utah’s conversion statute, your business in the new form of an LLC is considered to be “a continuation of the existence of” your converted corporation.
Please note: Changes to key sections of Utah’s conversion laws will go into effect on July 1, 2013. This article is based on the current version of the conversion laws. The current conversion procedure is codified primarily in Section 16-10a-1008.7 and Sections 48-2c-1401 through 48-2c-1405 of the Utah Code. Check for updates to the law.
To convert your Utah corporation to a Utah LLC, you need to:
Unlike many other states with conversion statutes, Utah does not specifically require you to prepare and have your corporation’s board of directors adopt a “plan of conversion” or similar document in order for your corporation to approve the conversion. (However, there is some indication that your corporation is expected to present the articles of conversion to its shareholders as part of the process for approving the conversion.)
Generally speaking, approval of the conversion will be a matter for your corporation’s shareholders. However, Utah’s statute lays out several possible approaches to conversion approval, and you will need to figure out which one applies in your case. As a first step, look at your corporation’s articles of incorporation and bylaws. If they contain procedures for approving a conversion, those are the procedures you should follow. However, if the articles of incorporation and bylaws do not contain conversion procedures, then the approval process will vary depending on whether your corporation has already issued shares of stock. If your corporation has issued stock, approval of the conversion requires a unanimous vote of all outstanding shares, in all share classes, and regardless of limitations or restrictions on voting rights. If your corporation has not issued shares, then the conversion must be approved by a majority of the corporation directors. For more information, check Utah Code § 7-16-5.2 (b).
The articles of conversion contain key information about the conversion, including such items as:
A blank articles of conversion form is available for download from the Department of Commerce.
The articles of organization for your new LLC will include:
For your convenience, the Department of Commerce publishes a blank articles of organization form.
The articles of conversion and articles of organization may appear straightforward. However, keep in mind that you need to learn the proper procedure for having your corporation approve the 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 $37, which is the cost for filing the articles of conversion including the articles of organization.
Finally, be aware that Utah’s conversion statute states not only that all of your corporation’s property, as well as all of its debts, liabilities, and obligations, are automatically transferred to the new LLC, but also that all rights of creditors relating to your business continue unimpaired, and any legal actions against your business “remain vested in” the new LLC. For more information, check Utah Code § 48-2c-1403.
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 adviser.
For further guidance on converting from a corporation to an LLC, check Corporations and S Corporations vs. LLCs. For information on conversion rules in other states, check Nolo’s 50-State Guide to Converting a Corporation to an LLC. 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).