The details of how to convert your Kansas limited liability company (LLC) to a Kansas 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 Kansas, 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 Kansas’s conversion statute, your business is considered to be “the same entity without interruption” as existed before the conversion. The conversion procedure is codified primarily in Sections 17-78-401 through 17-78-406 of the Kansas Statutes (K.S.A.).
To convert your Kansas LLC to a Kansas corporation, you need to:
The agreement of conversion contains key information about the conversion, including such things as:
In addition, the agreement of conversion must contain the proposed articles of incorporation for your new corporation.
To determine what is necessary to get proper shareholder approval of the agreement of conversion, you should first look to your LLC’s articles of organization and operating agreement. If they contain no rules for approving conversions, you should then check if they contain any rules regarding approval of mergers—conversions and mergers being two different legal processes. If there are voting rules for mergers, you should be applying them in conjunction with Kansas’s LLC merger laws as if the conversion were a merger. Ultimately, while the underlying law on LLC approvals of conversions is somewhat convoluted, it appears that if your articles of organization and operating agreement don’t provide otherwise, approval generally would require the consent of all LLC members. Consulting K.S.A. § § 17-78-403, 17-7681, and 17-78-203 may provide further insight; beyond this, it may well make sense to check with a local attorney regarding approval requirements.
The certificate of conversion will contain some of the same information as the agreement of conversion, as well as a few other items. More specifically, it must include:
For your convenience, a blank certificate of conversion is available for download from the Secretary of State.
The articles of incorporation must include:
The Secretary of State publishes a blank articles of incorporation form.
The agreement of conversion, certificate 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 minimum filing fee for this process likely will be $165, which is the cost for filing the certificate of conversion ($75) and the articles of incorporation ($90).
As a final point, be aware that Kansas’s conversion statute states not only that all of your LLC’s property, as well as all of its liabilities, are automatically transferred to the new corporation, but also that the name of your new corporation may be substituted for the name of your converted LLC in any pending legal actions. For more information, check K.S.A. § 17-78-406.
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 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.