The details of how you to convert your Maryland limited liability company (LLC) to a Maryland 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.
Statutory Conversions vs. Statutory Mergers
As an initial point, be aware that there is a distinction between a “conversion” and a “merger,” and more specifically between a “statutory conversion” and a “statutory merger.” A statutory conversion is a cheaper, quicker way to convert an LLC to a corporation—largely because you do not have to form a separate corporation before the conversion can occur. However, Maryland is one of only about fifteen states that do not allow statutory conversions of LLCs to corporations. Instead, Maryland only allows statutory mergers. Unlike statutory conversions, statutory mergers do require you to form a separate corporation before you can convert—or, more accurately, merge—your business.
Notwithstanding the distinction between statutory conversions and statutory mergers, “conversion” is a more general term that can include mergers. In this article, we’ll use “conversion” and “merger” somewhat interchangeably, sometimes speaking broadly about “conversions” and “converting” your business, even though, more narrowly and technically, we’ll be talking about a merger.
Maryland’s Merger Statutes
Bearing in mind that mergers can be among the most complicated of business transactions, this section provides a very brief summary of the process of conversion-via-merger under Maryland’s merger statutes. Like most states, Maryland has one merger statute under its General Corporation Law and another merger statute under its Limited Liability Company Act; portions of each of these statutes apply to a LLC-into-corporation merger. For details, check Sections 3-101 through 3-114 and Sections 4A-701 through 4A-709 of the Maryland Corporations and Associations Code Annotated (MCACA).
To convert your Maryland corporation to a Maryland LLC via a statutory merger, you need to:
- create a new corporation
- obtain LLC member approval of the merger
- have your corporation’s board of directors adopt a resolution to merge
- obtain stockholder approval of the proposed merger; and
- file articles of merger with the Department of Assessments and Taxation.
Step 1: Create a Corporation
Creating a corporation is a multi-step process. However, for immediate purposes, the key elements are preparing articles of incorporation and bylaws; the articles of incorporation will be filed with the Department of Assessments and Taxation. Through these formational documents, the members of your preexisting LLC will also become the stockholders of your new corporation. For more detailed information on forming a corporation in Maryland, check How to Form a Corporation in Maryland. Note: Initially, the name of your LLC cannot also be used as the name of your new corporation. However, you can specify in the plan of merger that the name of the corporation will be changed to the name of your LLC when the LLC merges into the corporation (at which point the LLC ceases to exist).
Step 3: LLC Approval of Plan
On the LLC side of this transaction, you should follow the provisions in your operating agreement, or other relevant agreement, for approving mergers. If no such provisions exist, then approval requires the consent of at least two-thirds of the LLC interests in profits. For more details, check MCACA § 4A-702(f).
Steps 3 and 4: Board Adoption of Resolution and Stockholder Approval of Merger
On the corporation side of this transaction, the board of directors must adopt a resolution containing the terms and conditions of the merge and stating that the merger is advisable; the stockholders must then approve the merger. (For a small business, the directors may well be the same people as the stockholders.) Approval of the merger requires a two-thirds majority of all votes entitled to be cast on the matter. Unlike some other states, the statute does not allow for the possibility that the articles of incorporation or board of directors may require a different majority vote. However, generally speaking, where the corporation is formed for the primary purpose of the merger, and the LLC members are also the corporation stockholders, it should be the case that all stockholders will approve the merger. For more details, check MCACA § 3-105.
Step 5: File Articles of Merger
Under Maryland law, the articles of merger are required to contain the following pieces of important information about the merger:
- the “terms and conditions” of the merger
- a statement the your LLC and your new corporation agree to merge
- the name and place of organization of your LLC (place of organization = Maryland)
- the name prior to the merger and place of incorporation of your new corporation (place of incorporation = Maryland)
- the name of your new corporation after the merger
- a statement of the Maryland county where your LLC has its principal office
- a statement of the Maryland county where your new corporation has its principal office
- a statement of each Maryland county where your LLC owns an interest in land
- a statement of each Maryland county where your new corporation owns an interest in land
- a statement that the terms and conditions contained in the articles of merger “were advised, authorized, and approved” by your new LLC as required by its articles of organization and by Maryland law, including “a statement of the manner of approval”
- a statement that the terms and conditions contained in the articles of merger “were advised, authorized, and approved” by your corporation as required by its articles of incorporation and by Maryland law, including “a statement of the manner of approval”
- any amendment to the your new corporation’s articles of incorporation to be effected by the merger
- for your LLC, the percentages of membership interests of each class of LLC membership interest and the class of members and respective percentage of membership interests in each class of membership interest
- for your corporation, the total number of shares of corporation, including the number in each class, the par value in each class, and the aggregate par value of all shares
- the manner and basis for converting LLC membership interests into corporation stock.
Note that some of these required items may not apply to your merger; for example, your business might not own any land at the time of the merger. The Department of Assessments and Taxation does not provide a blank form or template for the articles of merger; you will have to draft your own.
Other Important Advice
Some people may consider the formation of the new corporation, the merger approval process, and the articles of merger all to be straightforward. However, as mentioned above, mergers are complex transactions and often involve unexpected complications. Therefore, you should strongly consider working with a business attorney to draft the required documents and otherwise complete the merger process.
Your minimum filing fees for this process will be at least $220, which includes a minimum $120 for filing the articles of incorporation—though this amount could be higher depending on the number of shares, and aggregate par value ,of the new corporation’s stock—and $100 for filing the articles of merger.
The merger statute under Maryland’s General Corporation Law states not only that all of your LLC’s property, as well as all of its debts and liabilities, are transferred to the new corporation, but also that the rights of creditors against your business continue unimpaired, and any legal actions against your business “May be prosecuted to judgment as if the . . . merger had not taken place”—or your new corporation may be substituted for your old LLC as a party in such actions. For more information, check MCACA § 3-114.
Apart from the items mentioned in How to Form a Corporation in Maryland, one other important step when undertaking this type of merger is to make sure that no business contracts or agreements, such as bank documents, leases, licenses, and insurance, will be nullified by your LLC’s conversion to a corporation.
The foregoing information explains the basic steps for converting from an LLC to C Corporation. If you want to convert to an S Corporation, you will also need to file IRS Form 2553.
The IRS makes clear in a 2004 bulletin that, generally speaking, it will tax a statutory merger 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-into-corporation mergers 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.
Some Final Considerations
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.