If you’re thinking of converting the legal form of your small business from a corporation to a Massachusetts LLC, you should be aware of some basic facts regarding the state’s business-entity conversion process.
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 Massachusetts’s business-entity conversion statute as it applies to closely-held, for-profit Massachusetts corporations converting to multi-member LLCs.
In Massachusetts, 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 forms with the Secretary of the Commonwealth (SOC). This procedure, technically known as “statutory conversion,” automatically transfers your corporation’s assets and liabilities to that 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, as it is considered to continue its existence in the new form of an LLC. The conversion procedure is codified primarily in Chapter 156D, Sections 9.50 through 9.56 of the Massachusetts General Laws (MGL).
To convert your Massachusetts corporation to a Massachusetts LLC, you need to:
The plan of conversion is a relatively simple statement of key elements of the conversion; it must provide:
In addition, in Massachusetts, the plan of conversion must also include the full text of those “organic documents” for your new LLC that will take effect at the time of conversion; “organic documents” means your LLC’s certificate of organization and operating agreement. Particularly because these additional documents must be included, you should strongly consider getting the assistance of an attorney in preparing your plan of conversion.
By default, the Massachusetts conversion statute requires approval of the plan of conversion by a two-thirds majority of all shares entitled to vote, as well as two-thirds of shares in any separate voting group. However, the statute also lays out various possible alternative voting requirements for approving a plan; for more details, check MGL ch. 156D § 9.52.
The articles of entity contain basic information primarily about your corporation, including:
In addition, you need to include all the information that would be contained in your LLC’s certificate of organization; you will probably find it easiest to do this by simply attaching a copy of your certificate to the conversion articles. You can download a blank form of the articles of entity conversion from the SOC.
The certificate of organization will contain basic information about the new form of your business. A blank certificate of organization is available from the SOC. Note that while the certificate of organization may appear straightforward, 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 this document.
The minimum total filing fee for this process is $700, which includes filing of both the articles of entity conversion and the certificate of organization. The state requires that these two documents be filed together; if the certificate of organization is filed without the articles of entity conversion, no conversion subsequently will be permitted. You must also be up to date with filing your corporation’s annual reports with the state.
Massachusetts’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 and liens on any corporation property continue unimpaired against the new LLC, and all legal actions involving the corporation remain “vested in” the new LLC. For more information, check MGL ch. 156C, § 69.
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 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 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.