Converting an LLC to a Corporation or S Corporation in Texas
If you are planning on converting an LLC to a corporation in Texas, here's what you need to know.
The details of how to convert your Texas limited liability company (LLC) to a Texas corporation will vary depending on your specific situation. However, here is some general guidance on the process. For information on converting an LLC to a corporation in any other state, see Nolo's 50-State Guide to Converting an LLC to a Corporation.
Texas’s Conversion Statute
In Texas, you can use a relatively new, streamlined procedure that allows you to convert from an LLC to a corporation largely by filing a few 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. As a result of the statutory conversion, your LLC becomes a corporation, and so there is no need for a separate process to dissolve the LLC. Texas’s conversion statute can be found in Sections 10.101 through 10.109 of the Texas Business Organizations Code (BOC). If you’re looking at the statute, keep in mind that Texas—using terminology common in many states—refers generically to a “converting entity” (which will be the LLC) and a “converted entity” (which will be the corporation).
To convert a Texas LLC to a Texas corporation, you need to:
- file a certificate of conversion including a certificate of account status with the Secretary of State
- file a certificate of formation with the Secretary of State; and
- adopt a plan of conversion and file it with the Secretary of State.
A blank certificate of conversion, including instructions, is available from the Texas Secretary of State, as are blank certificates of formation for for-profit and nonprofit corporations. The instructions for the certificate of conversion state that you should include a certificate of account status from the Texas Comptroller of Public Accounts stating that all franchise taxes are paid—or else state in your certificate of conversion that the new corporation will be liable for all unpaid franchise taxes. (Note that the Texas Secretary of State has specifically stated that it has not adopted a form for converting an out-of-state entity to a Texas entity.)
Your certificate of formation should be filed with the certificate of conversion, and it must include a statement that the corporation is being formed pursuant to a plan of conversion, as well as information regarding the prior legal form of your business. The plan of conversion may, but need not, be attached to the certificate of conversion you file with the Secretary of State. However, if you do attach the plan of conversion to the certificate of conversion, the Secretary of State asks that the certificate of formation be included within the plan of conversion, for example as an exhibit.
While a plan of conversion need not be an extremely complicated document, it must at least include:
- the name of your LLC
- the name of your new corporation
- a statement that your LLC is continuing its existence as (“in the organizational form of”) your new corporation
- a statement that your LLC is to now be a Texas corporation; and
- the certificate of formation.
Although non-Texas business entities are not covered in this article, plans of conversion for such entities require some additional items of information under Texas law. It does not appear that the Secretary of State currently provides a sample plan of conversion; if you have questions, you should consult an attorney.
The foregoing information explains the basic steps for converting from an LLC to a C Corporation. If you want to convert to an S Corporation, you will also need to file IRS Form 2553. Note that you may be prohibited from electing S corporation status during your business’s first calendar year as a corporation—for more details, check with your tax adviser.
Apart from the foregoing steps, you will also need to take care of all the tasks normally associated with creating a new corporation, such as:
- drafting corporate bylaws
- electing corporate officers and appointing corporate directors
- holding an initial board meeting; and
- issuing stock certificates
It’s important that you follow all the required formalities for creating and maintaining a corporation 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).
You will also need to make sure that no business contracts or agreements, such as bank documents, leases, licenses, and insurance, will be nullified by changing your business entity from an LLC to a corporation.
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, 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.
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 further guidance on converting from an LLC to a corporation, check Corporations and S Corporations vs. LLCs.