Converting an LLC to a Corporation or S Corporation in Colorado
If you are planning on converting an LLC to a corporation in Colorado, here's what you need to know.
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The details of how to convert your Colorado limited liability company (LLC) to a Colorado corporation will vary depending on your specific situation. However, here is some general guidance on the process.
Colorado’s Conversion Statute
In Colorado, 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 forms 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. By the same token, there is also no need to dissolve your LLC; on the contrary, under Colorado’s conversion statute, the one business entity involved in the conversion, which is originally an LLC, is simply considered by default to continue its existence in the form of a corporation. The conversion procedure is codified primarily in Sections 7-90-201 through 7-90-202 of the Colorado Revised Statutes.
To convert your Colorado LLC to a Colorado corporation, you need to:
- prepare a plan of conversion
- get the LLC’s members to approve the plan of conversion; and
- file a statement of conversion and articles of incorporation with the Secretary of State
The plan of conversion contains key information about the conversion; at a minimum, it must provide:
- the fact that your business is currently formed as an LLC
- the name of your LLC
- the state where your LLC was formed (here we assume Colorado)
- the fact that after conversion your business will be a corporation
- the name of your corporation
- the state law under which your corporation is formed (Colorado); and
- “the terms and conditions of the conversion,” including the basis on which LLC membership interests will be converted into shares of corporation stock.
It may take some investigation to determine the conditions for a legitimate approval of the plan of conversion. Colorado law does not impose a specific default rule, such as a simple majority vote You will need to check your LLC’s articles of organization to see if there are any rules regarding approval of conversions, mergers, or amendments. Depending on the details of your specific LLC, it is possible that approval would require the vote of all members. For more details, check CRS § 7-90-201.4. Depending on the details of your situation and your level of expertise, it may be advisable to seek the assistance of an attorney in confirming what kind of approval is necessary and anything else you are not sure about in preparing the plan of conversion.
The statement of conversion is a relatively simple document that provides basic information primarily about your LLC, such as its name, the state where it was formed, and its address, as well as a statement that the LLC is being converted into a corporation pursuant to the Colorado conversion statute, and the name and address of the person filing the statement. At a minimum, the articles of incorporation will contain certain basic information about the new form of your business, including the name and address of the corporation and of the person filing the articles, as well as the name of the incorporator and the numbers and classes of shares to be issued. You can download a single PDF file containing blank templates of both the statement of conversion and articles of incorporation, as well as helpful instructions for the statement of conversion, from the Secretary of State’s website. Note that while the statement of conversion and articles of incorporation may appear straightforward, some of the issues involved in converting your particular business may involve unexpected complications, particularly with regard to the articles of incorporation. Therefore, it may be advisable to consult with a business attorney before completing these documents.
The total minimum filing fees for this process should be $100, which includes $50 to file the statement of conversion and $50 to file the articles of incorporation.
Colorado’s conversion statute states broadly that all of your LLC’s obligations, which generally would include things like debts and other liabilities, as well as lawsuits, carry over to your business in its new form as a corporation. For more information, check CRS § 7-90-202.
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.
Apart from the foregoing steps, you will 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 the required annual report with the state.
It’s important that you follow these required formalities 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).
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.
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.