The details of how you convert your Maine limited liability company (LLC) to a Maine 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.
The first thing to say about Maine’s conversion law is that it is a little bit confusing. Some rules for converting an LLC to a corporation appear under each of two different statutes— the Maine Limited Liability Company Act and the Maine Business Corporation Act. According to the Maine Secretary of State, you can convert your LLC under the authority of either Act—but, depending on which Act you choose, one of the forms you use will be different, as will the filing fee.
Regardless of which Maine statute you use for your LLC-to-corporation conversion, the procedure remains relatively simple, with a key step being the filing of a few basic documents with the Secretary of State. The 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 Maine’s conversion statute, your business “is for all purposes the same entity that existed before the conversion.”
The conversion procedure as it is codified under the Limited Liability Company Act—which is more likely the more complete and accurate set of conversion rules for this type of conversion—appears primarily in Sections 1645 through 1650 of Title 31 of the Maine Revised Statutes (M.R.S.). As it is codified under the Business Corporation Act, the procedure appears primarily in M.R.S. Title 13-C, Sections 951 through 958. This article mainly relies on the rules contained in the Limited Liability Company Act.
To convert your Maine corporation to a Maine LLC, you need to:
The plan of conversion contains key information about the conversion, including such things as:
The Limited Liability Act states simply that “A plan of conversion must be consented to by all the members of a converting limited liability company.” Unlike some other states’ conversion statutes, no allowance is made for the possibility that different voting rules are required or permitted by the LLC’s articles of organization or operating agreement. For more details, check 31 M.R.S. § 1646.1.
The statement of conversion contains some of the same information as the plan of conversion, as well as a few other items. More specifically, it must include:
A blank statement of conversion form is available for download from the Secretary of State. Note that the form includes a space for the effective date of your conversion if other than the filing date. (A different form, known as “articles of entity conversion,” is also available from the Secretary of State. According to Secretary of State personnel, this form may be used in place of the statement of conversion form, though a different filing fee is involved.)
The articles of incorporation, which must be filed with the statement of conversion, should include:
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 an operating agreement 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 minimum filing fee for this process likely will be $175, which is the cost for filing the statement of conversion including the articles of incorporation. (The filing fee is $145 if you file articles of entity conversion rather than a statement of conversion.)
Finally, be aware that Maine’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 any legal actions against the business may continue “as if the conversion had not occurred.” For more information, check 31 M.R.S. § 1648.2.
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.