The details of how to convert your South Carolina limited liability company (LLC) to a South Carolina 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 sometimes be significant, you should consult with a tax adviser before undertaking any conversion.
In South Carolina, you can use a relatively new, simplified procedure that allows you to convert your business from a corporation to an LLC largely by filing a single document with the Secretary of State. This procedure, technically known as “statutory conversion,” automatically transfers your corporation’s assets and liabilities to the new LLC. Unlike other methods of conversion, only one business entity is involved: you do not need to separately form an LLC before the conversion can occur. The conversion procedure is codified primarily in Sections 33-11-111 and 33-11-112 of the South Carolina Code of Laws (S.C. Code).
To convert your South Carolina LLC to a South Carolina corporation, you need to:
Under South Carolina’s conversion statute, the only stated requirement regarding the contents of the agreement of conversion is that it include the “terms and conditions” for converting LLC membership interests into corporation shares or other consideration. (You may want to consult with a local attorney for further guidance on this document).
By default, the conversion statute requires approval of the agreement of conversion by unanimous votes of all LLC members. However, the statute also allows for the possibility that a lesser vote is permitted by the LLC’s operating agreement. For more details, check S.C. Code § 33-44-908(b).
While many other states require that LLCs file both a certificate of conversion and articles of incorporation to convert to a corporation, in South Carolina you only need to file a single document: a special version of articles of incorporation which includes conversion information. More specifically, the special articles of incorporation must include:
For your convenience, a blank form for the special articles of incorporation is available for download from the Secretary of State.
Even if the agreement of conversion and special articles of incorporation strike you as straightforward, you should keep in mind that converting your particular business may involve unexpected complications. As mentioned above, you may want to consult with an attorney at least regarding the contents of the agreement of conversion. In any case, you will have to work with a lawyer at some point, because the State of South Carolina requires that you get an attorney to sign your articles of incorporation by way of certifying that your new corporation complies with the state’s incorporation laws.
Your minimum filing fee for this process likely will be $135, which is the cost for filing the special articles of incorporation.
Be aware that South Carolina’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 S.C. Code § 33-44-909.
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:
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.