Converting a Corporation or S Corporation to an LLC in Idaho
If you are planning on converting a corporation to an LLC in Idaho, here's what you need to know.
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If you’re thinking of converting the legal form of your small business from a corporation to an Idaho LLC, you should be aware of some basic facts regarding the state’s business-entity conversion process.
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 Idaho 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 Idaho’s business-entity conversion statute as it applies to closely-held, for-profit Idaho corporations converting to multi-member LLCs.
Idaho’s Conversion Statute
In Idaho, 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 Idaho’s conversion statute, your new LLC is “the same entity without interruption as” the corporation before the conversion. The conversion procedure is codified primarily in Sections 30-18-401 through 30-18-406 of the Idaho Code.
To convert your Idaho corporation to an Idaho LLC, you need to:
- have your corporation’s board of directors adopt a plan of conversion
- get the corporation’s shareholders to approve the plan of conversion; and
- file a statement of conversion and certificate of organization with the Secretary of State.
The plan of conversion contains key information about the conversion; at a minimum, it must include:
- the name and type of your business before conversion (type = corporation)
- the name and type of your business after conversion (type = limited liability company)
- the jurisdiction where your new LLC will be formed (Idaho)
- the proposed certificate of organization for your new LLC
- the full text of the proposed operating agreement for your new LLC; and
- the other terms and conditions of the conversion (a likely example would be the basis for converting corporate shares into LLC membership interests).
By default, the voting requirements for approving the plan of conversion depend on the “organic rules” for your corporation; in other words, check your bylaws for voting rules on conversions. Idaho law requires that the plan of conversion be approved based on any provisions in the bylaws, or in Idaho ‘s corporations law, regarding mergers—mergers being a different legal process than conversions. In practice, this will often mean that a conversion must be approved by a majority of shareholders in each share class entitled to vote. However, the law allows for the possibility that the articles of incorporation or the board of directors would present alternative voting requirements. For more details, check Idaho Code §§ 308-18-403 and 30-1-1104(5).
The statement of conversion contains some of the same basic information as the plan of conversion, as well as a few other items. More specifically, it must include:
- the name, jurisdiction of organization, and “type” of your business before conversion
- the name, jurisdiction of organization, and “type” of your business after conversion
- the effective date of the conversion, if other than the filing date
- a statement that the plan of conversion has been adopted and approved in accordance with § 30-18-405(d) of the Idaho Entity Transactions Act; and
- a statement that the text of your new your new LLC’s certificate of organization is attached to the statement of conversion.
There is no sample statement of conversion available online; however, if you contact the Business Entities division of the Idaho Secretary of State, you should be able to have a sample statement e-mailed to you. Also, the statute does give you the option to use your plan of conversion as your statement of conversion as long as it is properly signed on behalf of your corporation and contains all the information otherwise required to be in a statement of conversion.
The certificate of organization will contain information about your LLC, such as:
- the LLC’s name
- the street address and, if different, the mailing address of the LLC’s initial designated office
- the name and street address of the LLC’s registered agent
- the names and address of at least one LLC manager or member
- mailing address for future correspondence
- effective date for the certificate of organization, if other than filing date; and
- one or more authorized signatures.
For your convenience, the Secretary of State publishes a blank certificate of organization form.
The plan of conversion, statement of conversion, and certificate of organization all may appear straightforward; however, keep in mind that you also need to prepare a proposed 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.
The basic filing fee for this process is $30, which covers the cost of filing both the statement of conversion and certificate of organization.
As a final point, be aware that Idaho’s conversion statute states not only that all of the corporation’s property, as well as all of its liabilities, are automatically transferred to the new LLC, but also that the name of your new LLC may be substituted for the name of your pre-conversion corporation in any pending legal actions. For more information, check Idaho Code § 30-18-406.
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 an 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.
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.