If you're thinking of converting the legal form of your small business from a corporation to a Wyoming LLC, you should be aware of some basic facts regarding the state's business-entity conversion process. In general, the tax consequences associated with converting from a corporation to an LLC will be complicated. Therefore, for any kind of corporation-to-LLC conversion, you should consult with an experienced tax adviser.
Variable Elements of Conversions
First, let's be clear that there is not just one kind of corporation, one tax status for an LLC, or one kind of conversion. On the contrary, there are:
We won't be looking at every possible combination of these variables. Instead, we'll try to keep matters as simple as possible, focusing mainly on the general rules of Wyoming's business-entity conversion statute as it applies to closely-held, for-profit Wyoming corporations converting to multi-member LLCs.
Wyoming's Conversion Statute
In Wyoming, 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 few basic documents with the Secretary of State. This procedure, technically known as "statutory conversion," automatically transfers your corporation's property and obligations 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 17-16-1115, 17-16-1116, and 17-26-101 of the Wyoming Statutes (Wyo. Stat.).
To convert your Wyoming corporation to a Wyoming LLC, you need to:
Unlike most other states with conversion statutes, Wyoming does not explicitly require that your corporation's board of directors adopt a written "plan of conversion," and then recommend it to the shareholders for approval. (A plan of conversion usually contains the "terms and conditions" of the conversion, including the basis for converting corporate shares into LLC membership interests.) Moreover, compared to many other states, Wyoming's conversion laws lack detail regarding the shareholder approval process. There appear to be several places in the laws where shareholder approval of the conversion is briefly mentioned; taken together, they suggest you must look to your corporation's articles of incorporation, bylaws, and other relevant documents (if any) for guidance. There is no obvious indication of what rules apply if neither the articles of incorporation, the bylaws, nor any other relevant corporation document contain provisions regarding shareholder approval. While you may want to look at Wyo. Stat. § § 17-16-1115(d)(iv), 17-26-101(c), and 17-26-101(e)(iii), ultimately you should consult with a local business attorney regarding the approval issue.
The conversion statement will contain basic information about the conversion, such as:
The articles of organization will contain information about your new LLC, including:
Also, the articles of organization must include a consent form for the appointment of a registered agent for the new LLC, which will contain name, address, and other contact information for the agent, as well as the agent's signature. For your convenience, the Secretary of State publishes a document containing both a blank articles of organization form and blank registered agent consent form.
The conversion statement and articles of organization may appear straightforward. However, keep in mind that you need to determine the correct voting rules for your particular corporation regarding shareholder approval of the conversion. Moreover, converting your particular business may involve unexpected complications. Therefore, and as mentioned earlier, you should strongly consider working with a business attorney to draft the required documents and otherwise assist you in completing the conversion process.
Your minimum filing fee for this process likely will be $100, which is the cost for filing the conversion statement, the articles of organization, and the registered agent's consent to appointment.
Finally, be aware that Wyoming's conversion statute states not only that all of your corporation's property, as well as all of its obligations, are automatically transferred to the new LLC, but also that any legal actions against your business may continue "as if the conversion had not occurred." For more information, check Wyo. Stat. § § 17-16-1116 and 17-26-101(g).
Additional Steps
Apart from the foregoing steps, you will also need to take care of all the tasks normally associated with creating and running a new LLC, such as:
Following the proper LLC formalities is important for maintaining the limited liability status of your business and ensuring certain potential tax benefits. For a more complete discussion of the steps involved in forming and running an LLC, consult Your Limited Liability Company: An Operating Manual, 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 conversion.
Tax Consequences
A key point to keep in mind is that converting a C corporation to an LLC taxed as a partnership often results in a large tax bill. This is largely because the IRS considers this kind of conversion to be a liquidation of the corporation for which the corporation will owe tax, on top of which the corporation's stockholders will also be taxed personally on the corporate assets assumed to be distributed to them; in other words, there is double taxation.
Converting a corporation to an LLC that will continue to be taxed as a corporation generally does not have the same degree of adverse tax consequences as when converting to an LLC taxed as a partnership, and may even be largely tax-free. However, as this type of conversion will not change the basic elements of how your business will be taxed going forward, you should investigate closely how it would benefit the business, other than by providing a more flexible management structure. Also, in order for your LLC to continue to be taxed as a corporation, you must file a special election form with the IRS.
Converting from an S corporation to an LLC is fundamentally different from converting from a C corporation, because an S corporation has only one level of taxation. As a rule, an S corporation itself does not pay tax, only its shareholders do. Therefore, the tax consequences for this type of conversion are often more limited than conversions from a C corporation.
In general, the tax consequences associated with converting from a corporation to an LLC will be complicated. Therefore, for any kind of corporation-to-LLC conversion, you should consult with an experienced tax adviser.
Additional Information
For further guidance on converting from a corporation to an LLC, check Corporations and S Corporations vs. LLCs. Also, while they are not a substitute for expert tax advice, you should also consider looking at Tax Savvy for Small Business, by Frederick Daily (Nolo), and Legal Guide for Starting & Running a Small Business, by Fred Steingold (Nolo). For information on conversion rules in other states, check Nolo's 50-State Guide to Converting a Corporation to an LLC.