Converting an LLC to a Corporation in Massachusetts
If you are planning on converting an LLC to a corporation in Massachusetts, here's what you need to know.
The details of how you convert your Massachusetts limited liability company (LLC) to a Massachusetts corporation will vary depending on your specific situation. However, here is some general guidance on the process. Because the tax consequences can be significant, you should consult with an attorney before undertaking a business entity conversion.
Massachusetts’s Conversion Statute
In Massachusetts, 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 single form with the Secretary of the Commonwealth (SOC). This procedure, technically known as “statutory conversion,” automatically transfers your LLC’s assets and liabilities to that 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. There is also no need to dissolve your LLC, as it is considered to continue its existence in the new form of a corporation. The conversion procedure is codified primarily in Chapter 156D, Sections 9.50 through 9.56, and Chapter 156C, Sections 59 through 61 of the Massachusetts General Laws (MGL).
To convert your Massachusetts LLC to a Massachusetts corporation, you need to:
- get the LLC’s members to approve the conversion; and
- file articles of entity conversion, including articles of organization, with the SOC.
By default, the conversion must be approved by a simple majority of LLC membership interests; or, if there is more than one class of members, then a majority of interests in each class. However, the relevant statute also allows for the possibility that an LLC’s operating agreement provides for different rules regarding approval; for more details, check MGL ch. 156C § 60. As a technical point, Massachusetts’s rules for approving a conversion from LLC to corporation come from that part of the state’s Limited Liability Company Act regarding mergers as opposed to conversions; the Act does not directly provide approval procedures for conversions, and so the law instructs that the rules relating to approvals for mergers be used. Similarly, if you have a relatively old LLC operating agreement, it may contain approval provisions relating to “mergers” but not “conversions;” in some cases, those “merger” provisions may be treated as though they referred to “conversions.” For details on this point, check MGL ch. 156D § 9.52(7). In sum, while you certainly should review your LLC’s articles of organization and operating agreement prior to voting to approve a conversion, you should also consider consulting with an attorney to make sure you correctly understand the law on this point.
The articles of entity conversion provide information about your corporation, and, to a limited extent, your LLC, including such things as:
- the name of your LLC
- the name of your new corporation
- a statement that your plan of conversion was approved in accordance with Massachusetts’s LLC Act; and
- information that would be required in a separate articles of organization for the new corporation.
The last listed item is important; the information required for a Massachusetts corporation’s articles of organization includes, among other things, the number of shares of stock your corporation will issue, information about multiple classes or series of shares, and the name and address of each incorporator. The easiest way to ensure that your articles of entity conversion include all the necessary information is to use the blank form available from the SOC. This form combines the information required for the articles of entity conversion with the information required for all information that would otherwise be contained in separate articles of organization. Ultimately, because converting your particular business may involve unexpected complications, it may be advisable to consult with a business attorney before completing the SOC articles of entity conversion form.
The minimum total filing fee for this process is $475.
Keep in mind that Massachusetts’s conversion statute states not only that all of the corporation’s property, as well as liabilities, are automatically transferred to the new LLC, but also that all legal actions against the corporation continue against the new LLC “as if the conversion had not occurred.” For more information, check MGL ch. 156D, § 9.55.
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 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 the required 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, 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.