The details of how to convert your Hawaii limited liability company (LLC) to a Hawaii corporation will vary depending on your specific situation. However, here is some general guidance on the process of conversion to a for-profit corporation. Because the tax consequences can be significant depending on your circumstances, you should consult with a tax adviser before undertaking any conversion.
In Hawaii, 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 Department of Commerce and Consumer Affairs (DCCA). 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. By the same token, there is also no need to dissolve your corporation. Instead, under Hawaii’s conversion statute, your business “continue[s] to exist without interruption” in the new form of an LLC. The conversion procedure is codified primarily in Sections 428-902.5 through 428-903 of the Hawaii Revised Statutes (H.R.S.).
To convert your Hawaii LLC to a Hawaii corporation, you need to:
The plan of conversion contains key information about the conversion. At a minimum, it should include:
The rules governing approval of the plan of conversion will vary depending on what is contained in your LLC’s operating agreement. If your operating agreement provides specific voting rules for approval of a conversion (or merger), then those rules will apply, so long as at least a majority of members holding ownership approve the plan. If your operating agreement has no such voting provision, all members must approve the plan. For more details, check H.R.S. § 428-904(e)(1).
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, they should include:
In addition, a copy of the articles of incorporation must be filed with the articles of conversion. A blank articles of conversion form, including basic instructions, is available for download from the DCCA.
The articles of incorporation will contain information about your corporation, such as:
The DCCA makes it easy for you to prepare your articles of incorporation by publishing a blank articles of incorporation form.
The plan of conversion, articles of conversion, and articles of incorporation 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.
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). Additional fees, such as for corporation name reservation ($10), may also be necessary.
Finally, be aware that Hawaii’s conversion statute states not only that all of the LLC’s property, as well as all of its liabilities and obligations, are automatically transferred to the new corporation, but also that any legal actions against the LLC may continue against the new corporation without the need to substitute any parties. In addition, all creditors’ rights against the LLC continue unimpaired against the new corporation. For more information, check H.R.S. § 428-903.
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.
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, 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.