Converting an LLC to a Corporation or S Corporation in Minnesota
If you are planning on converting an LLC to a corporation in Minnesota, here's what you need to know.
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The details of how to convert your Minnesota limited liability company (LLC) to a Minnesota corporation will vary depending on your specific situation. However, here is some general guidance on the process.
Minnesota’s Conversion Statute
In Minnesota, 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,” 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. (As the conversion statute puts it, “A converted organization [the new corporation] is for all purposes the same organization as the converting organization [the LLC].”) The conversion procedure is codified primarily in Sections 302A.681 through 302A.691 of the Minnesota Statutes (Minn. Stat.).
To convert your Minnesota LLC to a Minnesota corporation, you need to:
- prepare a plan of conversion
- have the LLC members approve the plan of conversion; and
- file articles of conversion, the plan of conversion, and articles of organization with the Secretary of State.
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 fact that the type of business to which you are converting is a corporation
- the terms and conditions of the proposed conversion
- the basis for converting LLC membership interests into corporate shares; and
- a copy of the corporation’s articles of incorporation.
By default, the Minnesota conversion statute requires approval of the plan of conversion by a majority of all shares entitled to vote. For more details, check Minn. Stat. § 302A.685.
The articles of conversion must contain the following pieces of information:
- the name of your LLC and of your new corporation
- the legal form of your business following conversion (corporation); and
- a statement that the plan of conversion has been approved in accordance with Minn. Stat. 302A.685.
In addition, the articles of conversion must include a copy of the plan of conversion and a copy of the corporation’s articles of incorporation. Blank articles of conversion, which largely incorporate the information required in the plan of conversion, as well as instructions, are available from the Secretary of State.
The articles of incorporation will contain basic information about your new corporation. This includes things like the corporation’s name, the name of its registered agent, the street address of its registered office, the number of authorized shares, and the names, addresses, and signatures of one or more incorporators. A blank articles of incorporation form is available online.
While the plan of conversion, articles 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 minimum total filing fee if you file by mail should be $35, which includes the certificate of conversion, plan of conversion, and articles of organization; other methods of filing, and other services, will increase the filing costs. Filing fee information is included with the instructions on the certificate of conversion form. Also, the Secretary of State provides a helpful handout that briefly summarizes the conversion filing process.
Keep in mind that Minnesota’s conversion statute states not only that title to all of the corporation’s property, as well as all of the corporation’s debts and liabilities, are automatically transferred to the new LLC, but also that any legal actions against the corporation may continue “as if the conversion had not occurred.” For more information, check Minn. Stat. § 302A.691 Subd 2.
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 renewal 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.