If you're thinking of converting the legal form of your small business from a corporation to a Florida LLC, you should be aware of some basic facts regarding the state's business-entity conversion process.
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 Florida's business-entity conversion statute as it applies to closely-held, for-profit Florida corporations converting to multi-member LLCs.
In Florida, you can use a relatively new, simplified procedure that allows you to convert your business from a corporation to an LLC largely by filing one key form with the Department 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, and you do not need to separately form an LLC before the conversion can occur. By the same token, there is also no need to dissolve your corporation; on the contrary, under Florida's conversion statute, the one business entity involved in the conversion, which is originally a corporation, is simply considered by default to continue its existence in the form of an LLC. Key elements of the conversion procedure are laid out in sections 607.1112, 607.1113, 607.1114, and 608.439 of the Florida Statutes (Fla. Stat.).
To convert your Florida corporation to a Florida LLC, you need to:
The plan of conversion contains key information about the conversion; at a minimum, it must provide:
The articles of organization that must be included with the plan of conversion can be relatively simple; at a minimum, they will include:
The articles must be signed by an authorized individual. The Department of State has sample articles of organization available for download. Be aware that the sample is not designed specifically for use in a corporation-to-LLC conversion. More generally, keep in mind that, depending on your level of expertise, it may be advisable to seek the assistance of an attorney in preparing your plan of conversion and articles of organization.
Florida's conversion statute requires that your corporation approve the plan conversion before you file the certificate of conversion with the Department of State. You must make sure all shareholders entitled to vote are notified of the matter. By default, the statute requires approval of the plan of conversion by a simple majority of votes in each share class entitled to vote. However, the statute also allows for alternative voting requirements, if, for example, such alternative requirements are imposed by the board of directors or are contained in the articles of incorporation. For more details, check Fla. Stat. 607.1103(5).
The certificate of conversion provides basic information about the conversion of your corporation to an LLC, such as:
You can download a PDF file containing a basic template of a certificate of conversion, including very basic instructions, from the Department of State. Note that while the certificate of conversion may appear straightforward, converting your particular business may involve unexpected complications; in its instructions, the Department of State recommends that you get the advice of an attorney.
The total minimum filing fee for this process should be $160, which includes $35 to file the certificate of conversion and $125 to file the articles of organization. Fees will be higher if, for example, you want certified copies.
Florida's conversion statute states not only that all of your corporation's property, as well as liabilities and obligations, are automatically transferred to the new LLC, but also that the rights of creditors and liens against the corporation continue unimpaired against the new LLC, and all legal claims and actions against the corporation continue against the LLC "as if the conversion did not occur." For more information, check Fla. Stat. 607.1114.
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 entity change.
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 advisor.
For additional, general guidance on converting from a corporation to an LLC, check Corporations and S Corporations vs. LLCs. For information on conversion rules in other states, check Nolo's 50-State Guide to Converting a Corporation to an LLC. And, 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).