Converting an LLC to a Corporation in California
If you are planning on converting an LLC to a corporation in California, here's what you need to know.
The details of how to convert your California limited liability company (LLC) to a California corporation will vary depending on your specific situation. However, here is some general guidance on the process.
California’s Conversion Statute
In California, you can use a relatively new, streamlined procedure that allows you to convert from an LLC to a corporation largely by filing a single document with the Secretary of State. This procedure, technically known as “statutory conversion,” will automatically convert your LLC to a corporation and automatically transfer your LLC’s assets and liabilities to that new corporation. Unlike other methods of conversion, only one business entity is involved, and you do not need to separately form a corporation before the conversion can occur. As a result of the statutory conversion, your LLC becomes a corporation, and so there is no need for a separate process to dissolve the LLC. Specific provisions for converting LLCs can be found in Sections 17540.1 through 17540.9 of the California Corporations Code (CA Code).
Briefly, to convert a California LLC to a California corporation, you need to:
- adopt a plan of conversion; and
- file Articles of Incorporation containing a statement of conversion with the Secretary of State.
The plan of conversion is a relatively simple statement of key elements of the conversion. According to CA Code Section 17540.3, it must include:
- the terms and conditions of your conversion
- the place of the organization of your new corporation
- the place of the organization of your LLC
- the name of your new corporation
- the manner of converting your LLC membership interests into shares of your new corporation
- the provisions of the articles of incorporation of your new corporation to which shareholders in the new corporation will be bound; and
- “any other details or provisions that are required by the laws under which the converted entity is organized, or that are desired by the parties.”
Depending on your level of expertise, it may be advisable to seek the assistance of an attorney in preparing this document. Generally speaking, the plan must be approved by a majority vote of the LLC members; however, CA Code § 17540.3 lays out several possible alternative voting requirements for approving a plan.
Once your plan of conversion is approved, you will need to prepare Articles of Incorporation that include a statement of conversion; the Articles will need to be signed by all LLC members, unless your LLC Operating Agreement or Articles of Organization provide otherwise. You will also need to pay a $150 filing fee.
The statement of conversion need not be complicated; according to CA Code § 17540.6, it must include:
- the name of your LLC
- the Secretary of State's file number for your LLC
- a statement that the your plan of conversion was approved by a vote of your LLC members that met the statutory requirements under CA Code § 17540.3, including “specifying each class entitled to vote and the percentage vote required of each class;” and
- the form of organization of the converted entity (e.g., “a California stock company”).
An instructional document from the Secretary of State provides additional details on some of these matters. It also includes a sample Articles of Incorporation that meets the minimum statutory requirements for this type of conversion. The sample Articles include, as Article V, a sample statement of conversion. As with the plan of conversion, you may want to seek the assistance of an attorney in preparing your Articles of Incorporation.
The foregoing information explains the basic steps for converting from LLC to C Corporation. If you want to convert to an S Corporation, you will also need to file IRS Form 2553. Note that you may be prohibited from electing S corporation status during your business’s first calendar year as a corporation—for more details, check with your tax advisor.
Apart from the foregoing steps, you will also need to take care of all the tasks normally associated with creating a new corporation, such as:
- drafting corporate bylaws
- electing corporate officers and appointing corporate directors
- holding an initial board meeting; and
- issuing stock certificates.
It’s important that you follow all the required formalities for creating and maintaining a corporation in order to ensure that your business continues to have limited liability. 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).
You will also need to make sure that no business contracts or agreements, such as bank documents, leases, licenses, and insurance, will be nullified by changing your business entity from an LLC to a corporation.
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 advisor 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. For additional, state-specific information, check this guidance from the California Franchise Tax Board.
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 further guidance on converting from an LLC to a corporation, check Corporations and S Corporations vs. LLCs.