Converting an LLC to a Corporation in Maryland
If you are planning on converting an LLC to a corporation in Maryland, here's what you need to know.
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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.
Maryland’s Conversion Statute
In Maryland, you can use a relatively new, simplified procedure that allows you to convert your business from an LLC to a corporation. Under the new procedure, your main task is to file a few basic documents with the MarylandState Department of Assessments and Taxation (SDAT). 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 4A-1101 through 4A-1108 of the Maryland Corporations and Associations Code Annotated (MCACA).
To convert your Maryland LLC to a Maryland corporation, you need to:
- get the LLC’s members to approve the plan of conversion, and
- file articles of conversion with SDAT.
Unlike some other states with conversion statutes, Maryland does not require a plan of conversion in addition to the the articles of conversion.
To determine the procedure for approving the conversion, you should first check your LLC’s articles of organization and operating agreement. If either of those documents contains rules for conversion approval, you should follow those rules. If there are no such rules in either of the latter documents, approval requires the consent of at least two-thirds of the interest in profits of the limited liability company (which typically means two-thirds of the members).
The articles of conversion must contain basic information about the conversion, including:
- the name of your LLC and the date of filing of its original articles of organization
- the name of your new corporation and the place of its incorporation (Maryland)
- a statement that the conversion has been approved in accordance with MCACA Subtitle 4A (the section of Maryland’s LLC law dealing with conversions)
- the manner and basis of converting or exchanging membership interests in the LLC into shares of stock, other ownership interests of the new corporation, or other consideration, and the treatment of any membership interests not to be converted or exchanged
- the effective date of the articles of conversion if not the same as the filing date, and
- any other information necessary to effect the conversion.
Unlike other states, SDAT does not currently have a template or form for the articles of conversion that you can download.
The articles of conversion 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 $100, which is the cost for filing the articles of conversion with SDAT.
All of your LLC’s assets and property, as well as all of its debts and obligations, are automatically transferred to the new corporation. In addition, be aware that any claim, action, or proceeding against your business—such as lawsuits—may continue “as if the conversion had not taken place.”
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.
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:
- drafting corporate bylaws
- electing corporate officers and appointing corporate directors
- holding an initial board meeting
- issuing stock certificates
- using the official corporation name on your business documents; and
- filing an annual report (also known in Maryland as a personal property return).
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, check out Incorporate Your Business: A Legal Guide to Forming a Corporation in Your State, by Anthony Mancuso (Nolo).
Maryland’s conversion statute states that conversion does not invalidate, terminate, suspend, or nullify any licenses, permits, or registrations granted to your LLC. Nonetheless, one other key step is to make sure that no business contracts or agreements, such as bank documents, leases, and insurance, will be affected by your business’s conversion.
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.
Other Considerations and Information
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 Converting an LLC to a Corporation or S Corporation and 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.