Converting an LLC to a Corporation or S Corporation in New Mexico
If you are planning on converting an LLC to a corporation in New Mexico, here's what you need to know.
The details of how to convert your New Mexico limited liability company (LLC) to a New Mexico corporation will vary depending on your specific situation. However, here is some general guidance on the process of conversion to a for-profit corporation. Because the tax consequences can be significant, you should consult with a tax adviser before undertaking any conversion.
New Mexico’s Conversion Statute
In New Mexico, 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 documents with the Public Regulation Commission (PRC). 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. The conversion procedure is codified primarily in Sections 53-19-59 through 53-19-63 of the New Mexico Statutes Annotated (N.M.S.A.).
To convert your New Mexico LLC to a New Mexico corporation, you need to:
- prepare an agreement of conversion
- get the LLC’s members to approve the terms and conditions of the conversion; and
- file a statement regarding the conversion and articles of incorporation with the PRC.
Under New Mexico’s conversion statute, the agreement of conversion is described briefly and broadly as needing to state the “terms and conditions” of the conversion of members’ interests into corporate stock and/or cash. See N.M.S.A. § 53-19-60.1(C).
By default, New Mexico’s conversion statute requires approval of the terms and conditions of the conversion by whatever number or percentage of LLC members or managers is specified in your LLC’s operating agreement. However, if the operating agreement contains no rules for approving a conversion, then the consent of all LLC members is required for approval. See N.M.S.A. § 53-19-60.1(B).
The statement regarding the conversion must contain a few basic pieces of information regarding the conversion, including:
- a statement that your new corporation was converted from an LLC
- the name of your LLC prior to its conversion
- a statement of the number of LLC member or manager votes casts for and against conversion, including, if the vote is less than unanimous, the number or percentage required for approval according to the LLC operating agreement; and
- a statement that your LLC’s articles of organization are to be cancelled as of the effective date of the conversion.
At this time, there is no preformatted form for the conversion statement available from the PRC; you will have to draft your own.
The articles of incorporation will include basic information about your new corporation, such as:
- its name
- its duration
- its purpose
- the total number of shares that the corporation is authorized to issue
- the New Mexico street address of the corporation’s initial registered office and the name of initial registered agent at that address
- the names and addresses of the initial directors
- the name and address of each incorporator; and
- an authorized signature.
For your convenience, the PRC publishes a blank articles of incorporation form that includes thorough instructions.
The agreement of conversion, conversion statement, and articles of incorporation all may appear straightforward. However, keep in mind that you need be sure about the correct voting rules for approving the conversion, and also need to draft both the agreement of conversion and the conversion statement. Moreover, converting your particular business may involve unexpected complications. Therefore, it may be advisable to work with a business attorney to draft the required documents and otherwise complete the conversion process.
The minimum filing fee for this process is $200, which includes filing of both the conversion statement and articles of incorporation. (This fee assumes that you authorize your new corporation to issue 100,000 or fewer shares of stock; if you wish to authorize the issue of a greater number of shares of stock, higher fees will apply.)
New Mexico’s conversion statute states not only that all of your LLC’s property, as well as all of its debts, liabilities, and other obligations are automatically transferred to the new corporation, but also that any legal actions against your business may continue “as if the conversion had not occurred.” For more information, check N.M.S.A. § 53-19-61.
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 a biennial 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, 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.