If you’re thinking of converting the legal form of your small business from a corporation to a Michigan 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 Michigan’s business-entity conversion statute as it applies to closely-held, for-profit Michigan corporations converting to multi-member LLCs.
In Michigan, 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 Department of Licensing and Regulatory Affairs (LARA). 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 Michigan’s conversion statute, the articles of incorporation are canceled as part of the conversion, and the business is considered to “survive” in the new form of an LLC. The conversion procedure is codified primarily in Sections 450.1745 and 450.1703a of the Michigan Compiled Laws (MCL).
To convert your Michigan corporation to a Michigan LLC, you need to:
The plan of conversion contains key information about the conversion; this includes such things as:
For more specificity regarding what stock information is required, check MCL § 450.1745(1)(b).
By default, the Michigan conversion statute requires approval of the plan of conversion by a simple majority of all shares entitled to vote, as well as a simple majority of shares in each separate voting group, if any. For more details, check MCL § 450.1730a. (As a technical point, Michigan’s rules for approving a conversion from corporation to LLC come from the part of the state’s corporation law the deals with mergers as opposed to conversions; the conversion statute does not provide approval procedures for conversions, and instead states that the rules relating to approvals for mergers be used.)
The certificate of conversion is a relatively simple document that provides basic information primarily about your corporation and new LLC, including such things as:
A blank certificate of conversion including instructions is available from LARA.
The articles of organization will contain basic information about your new LLC. This includes things like the LLC’s name, the name of its registered agent, and the street address of its registered office. A blank articles of organization form is available online.
While the plan of conversion, certificate of conversion, and articles of organization may appear straightforward, 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 total filing fees for this process likely will be at least $110, which includes filing fees for both the certificate of conversion and the articles of organization; in many cases, such as when assumed names are involved, you will end up paying a higher amount. Filing fee information is included with the instructions on the certificate of conversion form.
Michigan’s conversion statute states not only that title to all of the corporation’s property, as well as all of the corporation’s liabilities and obligations, are automatically transferred to the new LLC, but also that any legal actions against the corporation may continue “as if the conversion had not occurred,” and that the LLC may be substituted for the corporation in such an action. For more information, check MCL § 450.1745(3).
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 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, check Nolo’s 50-State Guide to Converting a Corporation to an LLC.