The details of how to convert your Idaho limited liability company (LLC) to an Idaho corporation will vary depending on your specific situation. In addition, the tax consequences can be significant, so you should consult with a tax adviser before undertaking any conversion.
Here is some general guidance on the process of conversion to a for-profit corporation.
In Idaho, 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 LLC’s assets and liabilities to the new corporation. Unlike other methods of conversion, only one business entity is involved: you do not need to separately form a corporation before the conversion can occur. By the same token, there is also no need to dissolve your LLC. Instead, under Idaho’s conversion statute, your new corporation is “the same entity without interruption as” the LLC before the conversion. The conversion procedure is codified primarily in Sections 30-18-401 through 30-18-406 of the Idaho Code.
To convert your Idaho LLC to an Idaho corporation, you need to:
The plan of conversion contains key information about the conversion. At a minimum, it must include:
By default, the voting requirements for approving the plan of conversion depend on the “organic rules” for your LLC. In other words, check your LLC operating agreement for voting rules on conversions. If the operating agreement does not contain rules for voting on conversions, Idaho law requires that the plan of conversion be approved based on any provisions regarding mergers that are in the certificate of organization or in Idaho’s LLC Act —mergers being a different legal process than conversions. In practice, this will often mean that the conversion must be approved by all LLC members. There are also further rules regarding the rights of members who would have personal liability following the conversion. For more details on approval requirements, check Idaho Code § § 308-18-403 and 30-6-1002, or consult an attorney.
The statement of conversion contains some of the same basic information as the plan of conversion, as well as a few other items. More specifically, it must include:
There is no sample statement of conversion available online. However, if you contact the Business Entities division of the Idaho Secretary of State, you should be able to have a sample statement emailed to you. Also, the statute does give you the option to use your plan of conversion as your statement of conversion, so long as it is properly signed on behalf of your LLC and contains all the information otherwise required to be in a statement of conversion.
The articles of incorporation will contain information about your corporation, such as:
For your convenience, the Secretary of State publishes a blank articles of incorporation form.
The plan of conversion, statement of conversion, and articles of incorporation all may appear straightforward. However, keep in mind that you also need to prepare proposed 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.
The basic filing fee for this process is $30, which covers the cost of filing both the statement of conversion and articles of incorporation.
As a final point, Idaho’s conversion statute states that all of the LLC’s property, as well as all of its liabilities, are automatically transferred to the new corporation, and that the name of your new corporation may be substituted for the name of your pre-conversion LLC in any pending legal actions. For more information, check Idaho Code § 30-18-406.
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, 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.