Converting an LLC to a Corporation or S Corporation in Michigan
If you are planning on converting an LLC to a corporation in Michigan, here's what you need to know.
The details of how to convert your Michigan limited liability company (LLC) to a Michigan corporation will vary depending on your specific situation. However, here is some general guidance on the process.
Michigan’s Conversion Statute
In Michigan, 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 Department of Licensing and Regulatory Affairs (LARA). 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. By the same token, there is also no need to dissolve your LLC. Instead, under Michigan’s conversion statute, the articles of organization are canceled as part of the conversion, and the business is considered to “survive” in the new form of a corporation. The conversion procedure is codified primarily in Section 450.4708 of the Michigan Compiled Laws (MCL).
To convert your Michigan LLC to a Michigan corporation, you need to:
- prepare a plan of conversion
- have the LLC members approve the plan of conversion; and
- file a certificate of conversion and articles of incorporation with LARA.
The plan of conversion contains key information about the conversion. This includes such things as:
- the name of your LLC and of your new corporation
- the type of business to which you are converting (domestic profit corporation)
- a statement regarding the statute that will govern the internal affairs of your corporation (Act 284, Public Acts of 1972)
- the new corporation’s street address and, if different, your LLC’s street address
- the corporation’s principal place of business
- the “terms and conditions” of the conversion, including the basis for converting LLC membership interests into corporate shares; and
- the “terms and conditions” of the LLC’s “organizational documents” (articles of incorporation and bylaws).
By default, Michigan’s conversion statute for LLCs requires approval of the plan of conversion by a unanimous vote of the LLC members entitled to vote. However, the statute also allows for the possibility that an LLC’s articles of organization or operating agreement has different voting rules; for more details, check MCL § 450.4708(c).
The certificate of conversion is a relatively simple document that provides information primarily about your business before and after conversion, including such things as:
- the name of your LLC
- the name of you new corporation
- the legal form of your business following conversion (domestic profit corporation)
- the street address and principal place of business for your new corporation
- the effective date for the conversion
- a statement regarding the governing statute for your corporation (Act 284, Public Acts of 1972)
- a statement that the new corporation will provide a copy of the plan of conversion to any LLC member upon request and at no cost; and
- a statement, signed by an authorized individual, that the LLC has approved the conversion.
A blank certificate of conversion including instructions is available from LARA.
The articles of incorporation will contain basic information about your new corporation, including some information also contained in the certificate of conversion. More specifically, the articles of incorporation will include things like the corporation’s name, its purpose, the name of the corporation’s registered agent, the number of authorized shares, the names and addresses of the incorporators, and one or more incorporator signatures. A blank articles of incorporation form is available online.
While the plan of conversion, certificate of conversion, and articles of incorporation may appear straightforward, converting your particular business may involve unexpected complications. You should consider working with a business attorney to draft the required documents and otherwise complete the conversion process.
Your total filing fees for the conversion will vary depending on such things as use of assumed names and how many shares of stock you want authorized. Even in the least expensive scenario, minimum fees are likely to be around $100, which includes filing both the certificate of conversion and the articles of incorporation. Filing fee information is included with the instructions on the certificate of conversion form.
Michigan’s conversion statute states not only that title to all of the LLC’s property, and all of the LLC’s liabilities and obligations, are automatically transferred to the new corporation, but also that any pending legal actions against the LLC may continue “as if the conversion had not occurred,” and that the corporation may be substituted for the LLC in such an action. For more information, check MCL § 450.4708(3).
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 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, 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 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.