The details of how to convert your Iowa limited liability company (LLC) to an Iowa 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, you should consult with a tax adviser before undertaking any conversion.
In Iowa, 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. The conversion procedure is codified primarily in Sections 489.1006 through 489.1009 and Sections 490.1111 through 490.1114 of the Iowa Code.
To convert your Iowa LLC to an Iowa corporation, you need to:
The plan of conversion contains key information about the conversion and must include all of the following:
Generally speaking, Iowa’s conversion statute requires approval of the plan of conversion by all LLC members. However, there does seem to be some allowance for the possibility that, with certain restrictions, an LLC’s operating agreement could authorize different voting rules. For more details, check Iowa Code § 489.1014.
The articles of conversion contain some of the same information as the plan of conversion, as well as a few other items; more specifically, they must include:
At this time, unlike some other states, the Iowa Secretary of State does not provide a blank form or sample articles of conversion.
At a minimum, Iowa articles of incorporation must include the name of the corporation, the number of shares the corporation is authorized to issue, the street address of the corporation’s initial registered office and name of initial registered agent, and the name and address of each incorporator. As with the articles of conversion, the Secretary of State does not provide any form for the articles of incorporation.
The plan of conversion, articles of conversion, and articles of incorporation all may appear straightforward; however, keep in mind that you need to draft all of these documents yourself, as well as prepare corporate 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 complete the conversion process.
Your minimum filing fee for this process likely will be $55, which includes the cost for filing the articles of conversion ($5) and the articles of incorporation ($50).
Finally, be aware that Iowa’s conversion statute states not only that all of your 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 your business may continue “as if the conversion had not occurred.” For more information, check Iowa Code § § 489.1009 and 490.1114.
The foregoing information explains the basic steps for converting from LLC to 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.