If you’re thinking of converting the legal form of your small business from a Connecticut LLC to a Connecticut corporation, you should be aware of some basic facts regarding the state’s business-entity conversion process. Because the tax consequences can be significant, you should consult with a tax adviser before undertaking any conversion.
Statutory Conversions vs. Statutory Mergers
As an initial point, be aware that there is a distinction between a “conversion” and a “merger,” and more specifically between a “statutory conversion” and a “statutory merger.” A statutory conversion is a cheaper, quicker way to convert an LLC to a corporation—largely because you do not have to form a separate corporation before the conversion can occur. However, Connecticut is one of about ten states that do not allow statutory conversions of LLCs to corporations. Instead, Connecticut only allows statutory mergers. Unlike statutory conversions, statutory mergers do require you to form a separate corporation before you can convert—or, more accurately, merge—your business.
Note: In 2011, the Connecticut legislature amended its business entity laws. Consequently, effective January 1, 2014, it will be possible to convert LLCs to corporations via statutory conversions. In the meantime, however, only statutory mergers are available.
Notwithstanding the distinction between statutory conversions and statutory mergers, “conversion” is a more general term that can include mergers. In this article, we’ll use “conversion” and “merger” somewhat interchangeably, sometimes speaking broadly about “conversions” and “converting” your business, even though, more narrowly and technically, we’ll be talking about a merger.
Connecticut’s Merger Statutes
Bearing in mind that mergers can be among the most complicated of business transactions, this section provides a very brief summary of the process of conversion-via-merger under Connecticut’s merger statutes. As in most states, Connecticut has one merger statute under its corporations laws and another merger statute under its LLC laws; portions of each of these statutes apply to a LLC-into-corporation merger. For the most important parts of each of the two statutes, check Sections 33-815 through 33-821a and 34-193 through 34-197 of of the Connecticut General Statutes (Conn. Gen. Stat.).
To convert your Connecticut LLC to a Connecticut corporation via a statutory merger, you need to:
- create a new corporation
- prepare a plan of merger
- obtain LLC member approval of the plan of merger
- have your corporation’s board of directors adopt the plan of merger
- obtain shareholder approval of the plan of merger; and
- file a certificate of merger with the Secretary of the State.
Step 1: Create a Corporation
Creating a corporation is a multi-step process. However, for immediate purposes, the key elements are preparing certificate of incorporation and bylaws; the certificate of incorporation will be filed with the Secretary of the State. Through these formational documents, the members of your preexisting LLC will also become the shareholders of your new corporation. For more detailed information on forming a corporation in Connecticut, check How to Form a Corporation in Connecticut. Note: Initially, the name of your LLC cannot also be used as the name of your new corporation. However, you can specify in the plan of merger that the name of the corporation will be changed to the name of your LLC when the LLC merges into the corporation (at which point the LLC ceases to exist).
Step 2: Prepare a Plan of Merger
As its name suggests, the plan of merger will contain details about the merger. It must include:
- the name of your LLC and the name of your corporation prior to the merger
- the name of your corporation after the merger
- the “terms and conditions” of the merger
- the basis for converting LLC membership interests into corporation shares
- any amendments to the new corporation’s certificate of incorporation (such as a change in name); and
- any other provisions that may be required by your LLC’s articles of organization or your new corporation’s certificate of incorporation.
Step 3: LLC Approval of Plan
On the LLC side of this transaction, the plan must be approved either by at least two-thirds of the LLC membership interests, unless the LLC’s articles of organization or operating agreement provide otherwise. For more details, check Conn. Gen. Stat. 34-194.
Steps 4 and 5: Corporation Board and Shareholder Approval of Plan
On the corporation side of this transaction, the plan of merger must be adopted by a majority vote of the board of directors, and then approved by the shareholders. (Of course, for a small business, the directors may be the same people as the shareholders.) By default, approval of the plan of merger requires a simple majority of all votes in each voting group entitled to vote on the plan. However, the statute allows for the possibility that the certificate of incorporation or the board of directors will require a greater majority vote. For more details, check Conn. Gen. Stat. 33-817. (Generally speaking, where the corporation is formed for the primary purpose of the merger, and the members of the LLC are also the shareholders of the corporation, it should be the case that all shareholders will approve the merger.)
Step 6: File a Certificate of Merger
The certificate of merger—to which your plan of merger will be attached—will repeat some of the same information as the plan of merger, as well as a few other items. More specifically, the certificate of merger will include:
- the name of your LLC and of your new corporation before the merger
- the name of your corporation after the merger
- the effective date of the merger, if later than the filing date
- any amendments to your new corporation’s certificate of incorporation (such as a change in name); and
- a statement that the plan of merger was duly authorized and approved by your LLC and your new corporation in accordance with the relevant sections of the of Connecticut General Statutes.
No template or blank form for the certificate of merger is available from the Secretary of the State; you will have to draft your own.
Other Important Advice
Some people may consider the formation of the new corporation, the plan of merger, the plan approval process, and the certificate of merger all to be straightforward. However, as mentioned above, mergers are generally complex transactions, and often involve unexpected complications. Therefore, you should strongly consider working with a business attorney to draft the required documents and otherwise complete the merger process.
Your minimum filing fee for this process probably will be $60, which is the cost for filing the certificate of merger.
Be aware that Connecticut’s corporations merger statute states not only that all of your LLC’s property, as well as all of its liabilities, are transferred to the new corporation, but also that the name of your new corporation may be substituted for your old LLC in any pending legal action. For more information, check Conn. Gen. Stat. 33-820.
Apart from the items mentioned in How to Form a Corporation in Connecticut, one other important step when undertaking this type of merger is to make sure that no business contracts or agreements, such as bank documents, leases, licenses, and insurance, will be nullified by your LLC’s conversion to a corporation.
The IRS makes clear in a 2004 bulletin that, generally speaking, it will tax a statutory merger as though the LLC members formally transferred all LLC assets and liabilities to the corporation in exchange for stock, and then immediately liquidated the LLC. However, the specific tax consequences for LLC-into-corporation mergers vary from one case to the next. Because the tax consequences can sometimes be significant, you should consult with a tax adviser before undertaking any conversion.
Some Final Considerations
Our main concern here has been converting the legal form of your business from an LLC to a corporation. However, if you’re seeking to convert your LLC’s tax status from partnership to corporation without changing the LLC’s legal form, you only need to file IRS Form 8832 (to be taxed as a C Corporation) or IRS Form 2553 (to be taxed as an S corporation). (By default, the IRS taxes a multi-member LLC as a partnership and a single-member LLC as a so-called “disregarded entity;” there is no separate IRS tax category for LLCs.) While the IRS forms for changing tax status are fairly straightforward, do be aware that this procedure—known as “Check-the-Box”—involves special eligibility criteria; you can find those criteria in the instructions included with the forms.
Keep in mind that certain considerations may affect the timing of your conversion. For example, if you are converting to a C Corporation in order to make your business more attractive to outside investors, you will probably need to convert before any investment occurs. Conversely, if outside investors are not at issue, but the specific nature of your LLC’s assets and liabilities will lead to an undesirable tax burden for the current tax year, you may need to at least temporarily delay the conversion.
For additional guidance on converting from an LLC to a corporation, check Corporations and S Corporations vs. LLCs. For information on conversion rules in other states, check Nolo’s 50-State Guide to Converting an LLC to a Corporation.