If you’re thinking of converting the legal form of your small business from a corporation to a Louisiana 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
- corporations formed under Louisiana 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 Louisiana’s business-entity conversion statute as it applies to closely-held, for-profit Louisiana corporations converting to multi-member LLCs.
Louisiana’s Conversion Statute
In Louisiana, 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 form with the Department 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, and 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; on the contrary, under Louisiana’s conversion statute, the one business entity involved in the conversion, which is originally a corporation, is simply considered by default to continue its existence in the form of an LLC. The conversion procedure is codified primarily in Sections 12:1601, 12:1602, 12:1603, 12:1604, and 12:1605 of the Louisiana Revised Statutes (R.S.).
To convert your Louisiana corporation to a Louisiana LLC, you need to:
- get the corporation shareholders to approve the plan of conversion; and
- file a conversion application and initial report with the Secretary of State.
Louisiana’s conversion statute requires that your corporation approve the conversion before you file the necessary paperwork with the Secretary of State. The statute is very general regarding what is necessary for approval, stating simply that the conversion must be approved in whatever manner is specified by the appropriate corporation documents and “in the same manner provided for by law.” In many cases, this will mean a simple majority vote of your corporation’s shareholders, but you should check your articles of incorporation and bylaws to make sure. (You can find the brief language regarding statutory approval requirements at R.S. § 12:1602(A).)
The conversion application provides key information primarily about your existing LLC and the new corporation you want to create. Note that the Secretary of State, following technical language in the conversion statute, tends to refer to the “converting entity” (which in this case means your corporation) and the “converted entity” (which in this case means your LLC). At a minimum, the application should include:
- the name of the converting entity (your corporation)
- the name of the converted entity (your new LLC)
- a statement that the converting entity is continuing its existence in the form of the converted entity (i.e., your corporation will continue its existence in the form of an LLC)
- the manner and basis for converting corporation stock into LLC membership interests
- a statement that the conversion has been authorized and approved in accordance with Louisiana’s conversion statute (R.S. 12:1601 et seq.)
- the information required in the LLC’s articles of organization (see below); and
- the signature of any corporation officer.
Louisiana does not have a sample conversion application available online; instead, the Secretary of State asks that you call the number provided on this webpage (see the section headed “Conversion of Business Entities”) and ask that a sample be faxed or emailed to you. The required information in an LLC’s articles of organization, which must be included in your conversion application, includes the name of your LLC, a statement that the LLC may engage in any lawful activity for which LLC’s may be formed, and the duration of the LLC (typically you will simply indicate “perpetual”). The initial report is a simple form containing basic information about your new LLC, including its name, street address, name and street address of any registered agent, and name and street address of each first manager or member. The Secretary of State publishes a PDF file containing blank forms for the articles of organization and initial report, along with basic instructions.
While the conversion application, articles of organization, and initial report may appear very simple, some of the issues involved in converting your particular business may involve unexpected complications; therefore, it may be advisable to consult with a business attorney before completing these documents.
The basic filing fee for this process should be $75, which covers the conversion application and initial report; however, you should check with the Secretary of State to confirm the amount of any fees before filing.
Louisiana’s conversion statute states not only that all of the corporation’s property, as well as liabilities and obligations, are automatically transferred to the new LLC, but also that all rights of creditors against the corporation continue against the new LLC “as if the conversion had not occurred,” and all legal actions involving the corporation may continue with the new LLC without substituting any parties. For more information, check R.S. § 1605.
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:
- drafting your LLC’s operating agreement
- 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 entity change.
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 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 additional, general 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. And, 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).