The process for converting the legal form of your small business from an Alaska LLC to an Alaska corporation is complicated; you should work with an attorney to make sure it is handled properly. Here we can only look at some very general background information.
No Statutory Conversions or Statutory Mergers
There is a distinction between a “conversion” and a “merger,” and more specifically between a “statutory conversion” and a “statutory merger.” Where available, a statutory conversion is generally the cheapest, quickest way to convert an LLC to a corporation —largely because you do not have to form a separate corporation before the conversion can occur. If, however, a statutory conversion is not available, in every state but Alaska you have the option to use a statutory merger to change a small business from LLC to corporation; unlike statutory conversions, statutory mergers do require you to form a separate corporation before you can convert—or, more accurately, merge—your business.
Alaska is the one state that does not allow either statutory conversions or statutory mergers. In Alaska, you will have to use a process widely known as “non-statutory conversion” to change the legal form of your business from LLC to corporation. Because non-statutory conversion is a complicated process, you should seek the assistance of a knowledgeable business attorney.
Variable Elements of Conversions
Keep in mind that there is not just one kind of corporation or one tax status for an LLC. On the contrary, there are:
We won’t get into how different possible combinations of these variables can affect the process of conversion, but it is important that you be aware that they exist.
Non-Statutory Conversion: A Very Brief Overview
To convert your Alaska LLC to an Alaska corporation via a non-statutory conversion, you will need to create a new corporation, and then transfer your LLC’s assets, directly or indirectly, to the new corporation.
Creating a corporation is a multi-step process. However, for immediate purposes, the key elements are preparing articles of incorporation and bylaws; the articles of incorporation will be filed with the Division of Corporations, Business and Professional Licensing. 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 Alaska, check How to Form an LLC in Alaska.
You can transfer your LLC’s assets to your new corporation through one of several methods, which are popularly known as “assets-up,” “assets-over,” and “interests-over.” Depending on the method you use, assets may be distributed to your corporation’s shareholders before ultimately being transferred to your new corporation. For additional information on each of these methods, check Converting an LLC to a Corporation or S Corporation and Converting an LLC to a Corporation - It's Not as Simple as It Seems. Any of the methods is likely to require the preparation of specialized agreements and obtaining approvals from LLC members and corporation shareholders. Ultimately, you should work with a business attorney to assist you with the transfer of assets.
When undertaking this type of conversion, it is important that you make sure that the change in the legal form of your business will not nullify any business contracts or agreements, such as bank documents, leases, licenses, and insurance.
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.