If you’re thinking of converting the legal form of your small business from a corporation to a Minnesota 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 Minnesota’s business-entity conversion statute as it applies to closely-held, for-profit Minnesota corporations converting to multi-member LLCs.
In Minnesota, 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 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. (As the conversion statute puts it, “A converted organization [the new LLC] is for all purposes the same organization as the converting organization [the corporation].”) The conversion procedure is codified primarily in Sections 302A.681 through 302A.691 of the Minnesota Statutes (Minn. Stat.).
To convert your Minnesota corporation to a Minnesota LLC, you need to:
The plan of conversion contains key information about the conversion. This includes such things as:
By default, the Minnesota conversion statute requires approval of the plan of conversion by a majority of all shares entitled to vote. For more details, check Minn. Stat. § 302A.685 Subd. 2.
The articles of conversion must contain the following pieces of information:
In addition, the articles of conversion also must include a copy of the plan of conversion and a copy of the LLC’s articles of organization. Blank articles of conversion, which largely incorporate the information required in the plan of conversion, as well as instructions, are available from the Secretary of State.
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, the street address of its registered office, and the names, addresses, and signatures of the LLC organizers. A blank articles of organization form is available online.
While the plan of conversion, articles 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 and file the required documents.
Your minimum total filing fee if you file by mail should be $35, which includes the articles of conversion, plan of conversion, and articles of organization. Other methods of filing, and other services, will increase the filing costs. Filing fee information is included with the instructions on the articles of conversion form. Also, the Secretary of State provides a helpful handout that briefly summarizes the conversion filing process.
Keep in mind that Minnesota’s conversion statute states not only that title to all of the corporation’s property, as well as all of the corporation’s debts and liabilities, 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.” For more information, check Minn. Stat. § 302A.691 Subd 2.
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 for 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.