The details of how to convert your Arkansas limited liability company (LLC) to an Arkansas corporation will vary depending on your specific situation. However, here is some general guidance on the process.
In Arkansas, you can use a relatively new, simplified procedure that allows you to convert your business from an LLC to a corporation 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. (As the conversion statute puts it, the converted business “is for all purposes the same entity that existed before the conversion.”) The conversion procedure is codified primarily in Sections 4-32-1201 through 4-32-1205 of the Arkansas Code (A.C.A.).
To convert your Arkansas LLC to an Arkansas corporation, you need to:
The plan of conversion contains key information about the conversion, including such things as:
By default, the Arkansas conversion statute requires approval of the plan of conversion by more than one-half of the LLC members. However, the statute also allows for the possibility that alternative voting requirements are contained in the LLC operating agreement. For more details, check A.C.A. § 4-32-1203.
The articles of conversion contain some of the same basic information as the plan of conversion, as well as a few other items. More specifically, it should include:
In addition, the articles of conversion either must include a copy of the plan of conversion, or else a statement that the plan of conversion is on file at a specified business office and will be furnished on request and without cost to any member of the LLC. A blank articles of conversion form is available from the Secretary of State.
The articles of incorporation will contain basic information about your new corporation. This includes things like the corporation’s name, the number of shares the corporation is authorized to issue along with their par value, information about share classes, the name and street address of the initial registered office, the name and street address of the initial registered agent, the names and addresses of the incorporators, a statement of the corporation’s purpose, the effective date of incorporation, and an authorized signature. The Arkansas Secretary of State website does not provide blank articles of incorporation forms for download; however, you can utilize the state’s online filing system to fill out and submit your articles of incorporation directly from your web browser.
The plan of conversion, articles of conversion, and articles of incorporation all may appear straightforward; however, keep in mind that you also need to prepare corporation bylaws as part of the plan of conversion. Moreover, 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 $100, which includes filing fees for both the articles of conversion ($50) and the articles of incorporation ($50).
Be aware that Arkansas’s conversion statute states not only that all of the LLC’s property, as well as all of its debts, liabilities, and other obligations, are automatically transferred to the new corporation, but also that any legal actions against the LLC may continue “as if the conversion had not occurred.” For more information, check A.C.A. § 4-32-1205.
The foregoing information explains the basic steps for converting from an LLC to a C Corporation. If you want to convert to an S Corporation, you will also need to file IRS Form 2553.
Apart from the foregoing steps, you will also need to take care of all the tasks normally associated with creating and maintaining a new corporation, such as:
It’s important that you follow all of these required formalities in order to ensure that your business continues to have limited liability and can take advantage of various potential tax benefits. For a more complete discussion of the steps involved in forming a corporation, consult Incorporate Your Business: A Legal Guide to Forming a Corporation in Your State, 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.
The IRS makes clear in a 2004 bulletin that, generally speaking, it will tax a statutory conversion 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-to-corporation conversions 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.
Other Considerations and Information
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.