Converting an LLC to a Corporation in North Dakota
If you are planning on converting an LLC to a corporation in North Dakota, here's what you need to know.
The details of how to convert your North Dakota limited liability company (LLC) to a North Dakota 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.
North Dakota’s Conversion Statute
In North Dakota, 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 10-32-108.1 through 10-32-108.6 of the North Dakota Century Code (N.D. Cent. Code).
To convert your North Dakota LLC to a North Dakota corporation, you need to:
- prepare a plan of conversion
- get the LLC members to approve the plan of conversion; and
- file articles of conversion and articles of incorporation with the Secretary of State.
The plan of conversion contains key information about the conversion, including such things as:
- the name and form of your business before conversion (form = business limited liability company)
- the name and form of your business after conversion (form = business corporation)
- the “terms and conditions” of the conversion
- the basis for converting LLC membership interests into corporate shares or money; and
- the articles of incorporation and bylaws for your new corporation.
North Dakota’s conversion statute assumes that an LLC may have a board of directors, and, with this in mind, it requires that the plan of conversion initially be approved by that board, and only then be approved by the LLC members. Also, unlike many other states’ conversion statutes, the North Dakota statute does not state how many members must vote in favor of the plan of conversion in order for it to be approved. While other sections of the North Dakota’s Limited Liability Company Act may provide greater specificity on voting requirements, and your LLC’s articles of organization or operating agreement may also contain guidance, ultimately you should consider consulting with a lawyer familiar with the laws in North Dakota. (The conversion statute’s rules for approving the plan of conversion, such as they are, are found at N.D. Cent. Code § 10-32-108.3 (1)(a).)
The articles of conversion contain some of the same information as the plan of conversion, as well as a few other items. Specifically, they must include:
- the name of your LLC immediately prior to conversion
- the name of your new corporation
- the form of your business after conversion
- the jurisdiction of the governing statute for your new corporation (North Dakota)
- a statement that the plan of conversion has been approved by your corporation as required in N.D. Cent. Code § 10-32-108.3
- a statement that the plan of conversion has been approved as required under the North Dakota Business Corporation Act
- a copy of the plan of conversion (without the articles of incorporation or bylaws); and
- a copy of your new corporation’s articles of incorporation.
The articles of incorporation for your new corporation, which must be filed with the articles of conversion, will include information such as the following:
- the name of your new corporation
- the name of a commercial or noncommercial registered agent in North Dakota
- if your corporation will have a noncommercial registered agent, that agent’s complete North Dakota address information, including a street address
- the effective date for the articles of incorporation
- your new corporation’s purpose (which may simply be “general business purposes”)
- the number of shares the corporation is authorized to issue, including share classes and par value per share
- the name and complete address, including street address, of each incorporator; and
- one or more authorized signatures.
For your convenience, the Secretary of State publishes a blank articles of incorporation form.
The plan of conversion, articles of conversion, and articles of incorporation all may appear straightforward; however, keep in mind that you also need to prepare bylaws as part of the plan of conversion. Moreover, converting your particular business may involve unexpected complications—for example, as mentioned above, there may be questions regarding the exact voting rules for approving the conversion. Therefore, it may be advisable to work with a business attorney to draft the required documents and otherwise complete the conversion process.
Be aware that North Dakota’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 the business may continue “as if the conversion had not occurred.” For more information, check N.D. Cent. Code § 10-32-108.6.
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:
- 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 with the state.
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.
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, 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.