If you’re thinking of converting the legal form of your small business from a corporation to a New Hampshire 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 New Hampshire 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 New Hampshire’s business-entity conversion statute as it applies to closely-held, for-profit New Hampshire corporations converting to multi-member LLCs.
New Hampshire’s Conversion Statute
NOTE: New Hampshire has revised its business-entity conversion statute; the new version of the statute becomes effective January 1, 2013. This article describes the conversion rules as they exist under the new version of the statute.
In New Hampshire, 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. The conversion procedure is codified primarily in Sections 293-A:11.03, 293-A:11.09, and 304-C:147 through 304-C:149 of the New Hampshire Revised Statutes Annotated (R.S.A.).
To convert your New Hampshire corporation to a New Hampshire 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 certificate of conversion, a certificate of formation, and a compliance statement (Form SRA) regarding LLC membership interests with the Secretary of State.
The plan of conversion must set forth “the terms and conditions” for converting shares of corporation stock into LLC membership rights. The plan most likely will also include other basic information, such as the name of your new LLC. However, unlike many other states’ conversion statutes, New Hampshire’s statute does not explicitly require such additional information. For more details, check R.S.A. § 304-C:149(III).
By default, approval of the plan of conversion requires a simple majority of the shareholders in each voting group entitled to vote on the plan. However, the statute also allows for the possibility that a greater vote is required by the articles of incorporation or board of directors. Note that that New Hampshire’s conversion statute does not itself contain rules for shareholder approval of a plan of conversion; instead, it directs that approval of a plan of conversion be on the same basis as approval of a plan of merger—a merger being a different legal process than a conversion. For more details, check R.A.S. §§ 304-C:149(II) and 293-A:11.03.
The certificate of conversion will contain certain key information about the conversion. It must include:
- the date on which your corporation was first created
- the jurisdiction where your corporation was first created, and, if this jurisdiction has since changed, the corporation’s jurisdiction immediately before conversion
- the name of your corporation at the time of conversion
- the name of your new LLC (this should match the LLC’s certificate of formation)
- certain information regarding outstanding corporation shares and number of votes entitled to be cast on the conversion plan in each voting group
- the total number of votes for and against the plan of conversion in each voting group
- a statement that the number of votes cast in favor of the plan of conversion by each voting group is sufficient to approve the plan
- a statement that the plan of conversion is on file at the new LLC’s principal place of business, along with the address of that principal place of business; and
- a statement that a copy of the plan of conversion will be provided by the converting business, “on request and without cost,” to any shareholder or other equity interest holder of the corporation.
The certificate of formation for your new LLC will contain basic information about the new business entity. This includes:
- the name of your new LLC
- the purpose of your new LLC
- the name, street address, and post office box (if any) of the LLC’s registered agent
- the duration of the LLC
- a statement regarding whether the LLC will be managed by one or more managers
- a statement regarding compliance with the New Hampshire Uniform Securities Act; and
- an authorized signature.
Finally, along with the certificate of conversion and certificate of formation, you also need to file New Hampshire Form SRA, which is a statement that your new LLC will comply with New Hampshire Securities Laws in regard to offering membership interests (“securities”) for sale—or that the new LLC is exempt from registering securities. (As noted on Form SRA itself, most small businesses will qualify for exemption from registration.)
A single downloadable file containing blank forms for the certificate of conversion, certificate of formation, and Form SRA, including instructions, is available from the Secretary of State.
The plan of conversion, certificate of conversion, certificate of formation, and Form SRA all may appear straightforward. However, 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.
Minimum filing fees for this process currently should be $135, which is the cost for filing the certificate of conversion, certificate of formation, and Form SRA.
Be aware that New Hampshire’s conversion statute states not only that all of your corporation’s property, as well as all of its debts, liabilities, and obligations, are automatically transferred to the new LLC, but also that any legal actions against the business may continue “as if the statutory conversion had not taken place”—or the new LLC may be substituted in the action.” For more information, check R.A.S. § 304-C:149(VIII).
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 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 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.