The details of how you convert your Tennessee limited liability company (LLC) to a Tennessee 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.
In Tennessee, 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 Department 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. By the same token, there is also no need to dissolve your corporation; instead, under Tennessee’s conversion statute, your new corporation is “deemed to be the same entity as the . . . LLC” that existed before conversion. The conversion procedure is codified primarily in Section 48-249-704 of the Tennessee Code Annotated (Tenn. Code Ann.).
To convert your Tennessee LLC to a Tennessee corporation, you need to:
Unlike many other states with conversion statutes, Tennessee does not require that you prepare a written plan of conversion as part of your LLC’s conversion approval process.
The approval procedure for the conversion will vary depending on whether your LLC is member-managed, manager-managed, or director-managed. If your LLC is member-managed, approval requires only a majority vote of the members. If your LLC is manager-managed, approval requires an additional, majority vote of the managers; similarly, if your LLC is director-managed, approval requires an additional, majority vote of the directors. For more details, check Tenn. Code Ann. § 48-249-704(c).
The certificate of conversion will contain basic information about the conversion, such as:
In addition, you must also file a charter for your new corporation with the certificate of conversion. A blank certificate of conversion form is available for download from the Department of State.
The charter for your new corporation will include items such as:
For your convenience, the Department of State publishes a blank charter form.
The certificate of conversion and charter may appear straightforward; however, keep in mind that 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.
Your minimum filing fees for this process will likely total $120, which includes a $20 fee for filing the certificate of conversion and a $100 fee for filing the charter.
Finally, be aware that Tennessee’s conversion statute states not only that all of your LLC’s property, as well as all of its debts, liabilities, and obligations, are automatically transferred to the new corporation, but also that all rights of creditors relating to LLC property remain unimpaired, and any legal actions against your business may continue “as if the conversion had not occurred.” For more information, check Tenn. Code Ann. § § 48-249-704(g) and 48-249-704(h).
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, 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.