The details of how to convert your Virginia limited liability company (LLC) to a Virginia 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 Virginia, 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 State Corporation Commission. 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 13.1-722.8 through 13.1-722.14 of the Code of Virginia (Va. Code).
To convert your Virginia LLC to a Virginia corporation, you need to:
The statutory requirements for the plan of conversion are stated briefly and broadly: the plan needs to contain the “terms and conditions” of the conversion, including the basis for converting LLC membership interests into corporation shares. Also, the articles of incorporation for your new corporation must be attached to the plan of conversion.
To determine the procedure for approving the plan of conversion, you should first check your LLC’s articles of organization and operating agreement. If either of those documents contains rules for conversion approval, you should follow those rules. However, if there is no provision in either of the latter documents regarding the approval of conversions, then approval requires a unanimous vote of all LLC members. For more details, check Va. Code § 13.1-722.11(B).
The articles of entity conversion, which must include both the plan of conversion and the articles of organization, contain basic information about the conversion, including:
The State Corporation Commission publishes an excellent template and instructions for the articles of entity conversion. You can use this template as a guide to prepare your own articles of entity conversion.
The articles of incorporation will include information about your new corporation, including:
For your convenience, the State Corporation Commission publishes a blank articles of organization form.
The plan of conversion, articles of entity conversion, and articles of incorporation all may appear straightforward; however, 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 fee for this process likely will be $100, which is the cost for filing the articles of entity conversion including the articles of incorporation and a copy of the plan of conversion.
Finally, be aware that Virginia’s conversion statute states not only that all of your LLC’s property, as well as all of its liabilities, are automatically transferred to the new corporation, but also that any legal proceedings against your business may continue “as if the conversion did not occur.” For more information, check Va. Code § 13.1-722.13.
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.
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 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.