The details of how to convert your Washington limited liability company (LLC) to a Washington 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.
Statutory Conversions vs. Statutory Mergers
As an initial point, be aware that there is a distinction between a “conversion” and a “merger,” and more specifically between a “statutory conversion” and a “statutory merger.” A statutory conversion is a cheaper, quicker way to convert an LLC to a corporation—largely because you do not have to form a separate corporation before the conversion can occur. However, Washington is one of only about fifteen states that do not allow statutory conversions of LLCs to corporations; instead, Washington only allows statutory mergers. Unlike statutory conversions, statutory mergers do require you to form a separate corporation before you can convert—or, more accurately, merge—your business.
Notwithstanding the distinction between statutory conversions and statutory mergers, “conversion” is a more general term that can include mergers. In this article, we’ll use “conversion” and “merger” somewhat interchangeably, sometimes speaking broadly about “conversions” and “converting” your business, even though, more narrowly and technically, we’ll be talking about a merger.
Washington’s Merger Statutes
Bearing in mind that mergers can be among the most complicated of business transactions, this section provides a very brief summary of the process of conversion-via-merger under Washington’s merger statutes. Like most states, Washington has one merger statute under its Business Corporation Act and another merger statute under its Limited Liability Company Act; portions of each of these statutes apply to a LLC-into-corporation merger. For the most important parts of each of the two statutes, check Sections 23B.11.080 through 23B.11.100 and 25.15.395 through 25.15.410 of the Revised Code of Washington (RCW).
To convert your Washington LLC to a Washington corporation via a statutory merger, you need to:
- create a new corporation
- prepare a plan of merger
- obtain LLC member approval of the plan of merger
- have your corporation’s board of directors adopt the plan of merger
- obtain shareholder approval of the plan of merger; and
- file articles of merger with the Secretary of State.
Step 1: Create a Corporation
Creating a corporation is a multi-step process. However, for immediate purposes, the key elements are preparing articles of incorporation and bylaws; the articles of incorporation will be filed with the Secretary of State. Through these formational documents, the members of your preexisting LLC will also become the shareholders of your new corporation. For more detailed information on forming an LLC in Washington, check How to Form a Corporation in Washington. Note: Initially, the name of your LLC cannot also be used as the name of your new corporation. However, you can specify in the plan of merger that the name of the corporation will be changed to the name of your LLC when the LLC merges into the corporation (at which point the LLC ceases to exist).
Step 2: Prepare a Plan of Merger
As its name suggests, the plan of merger will contain details about the merger. It must include:
- the name of your LLC
- the name of your new corporation prior to the merger
- the name of the corporation after the merger
- the “terms and conditions” of the merger; and
- the manner and basis for converting LLC membership interests into corporate shares.
In addition, the plan may include, among other things, amendments to your new corporation’s articles of incorporation (such as change in name).
Step 3: LLC Approval of Plan
On the LLC side of this transaction, follow the provisions in your operating agreement for approving mergers. If there are no such provisions, then approval requires the consent of more than 50% of the ownership interests in each class or group. For more details, check RCW § 25.15.400.
Steps 4 and 5: Corporation Board Adoption and Shareholder Approval of Plan
On the corporation side of this transaction, the plan of merger must be adopted by the board of directors, and then approved by the shareholders. (For a small business, the directors may well be the same people as the shareholders.) You should check your articles of incorporation for provisions on shareholder approval of mergers. If there are such provisions then, as long as they require at least a simple majority of each voting group entitled to vote separately on the plan, those provisions will apply. Otherwise, approval of the plan requires a two-thirds majority of the votes in each voting group entitled to vote separately on the plan. For more details, check RCW § 23B.11.030. (Generally speaking, where the corporation is formed for the primary purpose of the merger, and the LLC members are also the corporation shareholders, it should be the case that all shareholders will approve the merger.)
Step 6: File Articles of Merger
The articles of merger must include:
- a copy of your plan of merger
- a statement that the merger was duly approved by the members of your LLC pursuant to RCW 25.15.400; and
- a statement that the merger was duly approved by the shareholders of your new corporation pursuant to RCW 23B.11.030.
The Secretary of State does not provide a blank form or template for the articles of merger; you will have to draft your own.
Other Important Advice
Some people may consider the formation of the new corporation, the plan of merger, the plan approval process, and the articles of merger all to be straightforward. However, as mentioned above, mergers are generally complex transactions, and often involve unexpected complications. Therefore, you should strongly consider working with a business attorney to draft the required documents and otherwise complete the merger process.
Your total filing fees for this process likely will be at least $220, which includes $180 for filing the articles of incorporation for the new corporation and $40 for filing the articles of merger.
Be aware that the merger statute under Washington’s Business Corporation Act states not only that all of your LLC’s property, as well as all of its liabilities, are transferred to the new corporation, but also that any legal actions against your business may be continued “as if the merger did not occur”—or your new corporation may be substituted for your old LLC as a party in such actions. For more information, check RCW § 23B.11.100.
Apart from the items mentioned in How to Form a Corporation in Washington, one other important step when undertaking this type of merger is to make sure that no business contracts or agreements, such as bank documents, leases, licenses, and insurance, will be nullified by your LLC’s conversion to a corporation.
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.
The IRS makes clear in a 2004 bulletin that, generally speaking, it will tax a statutory merger 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-into-corporation mergers 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.
Some Final Considerations
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.