If you’re thinking of converting the legal form of your small business from a corporation to a Nevada 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 Nevada’s business-entity conversion statute as it applies to closely-held, for-profit Nevada corporations converting to multi-member LLCs.
In Nevada, 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 forms with the Secretary 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: 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; instead, under Nevada’s conversion statute, there is a “continuation of the existence” of your business in the new form of an LLC. The conversion procedure is codified primarily in Sections 92A.005 through 92A.280 of the Nevada Revised Statutes (NRS.). (The latter range of sections comprises most of Chapter 92A of the Nevada Revised Statutes, which is the chapter covering the state’s laws relating to “mergers, conversions, exchanges, and domestications.”)
To convert your Nevada corporation to a Nevada LLC, you need to:
The plan of conversion contains key information about the conversion; this includes such things as:
By default, the Nevada conversion statute requires approval of the plan of conversion by a majority of the voting power in each share class. However, the statute does allow for the possibility that other voting rules may apply, for example because of a provision in the articles of incorporation. For more details, check NRS § 92A.120.
The articles of conversion must contain the following pieces of information:
In addition, the articles of conversion must include a copy of the LLC’s articles of organization, and, optionally, a copy of the plan of conversion. (If you choose not to include the plan of conversion, you must make sure a signed copy is on file at the new LLC’s registered office.) Blank articles of conversion, including instructions, are available from the Secretary of State. You should use the state’s form to complete your filing.
The articles of organization will contain basic information about your new LLC. This includes things like the LLC’s name, the name and Nevada address of its registered agent, how the LLC will be managed (by managers or by members), names and addresses of each manager or managing member, and signatures of the LLC organizer and registered agent. A blank articles of organization form, including instructions, is available online.
While the plan of conversion, articles of conversion, and articles of organization may appear straightforward, converting your particular business may involve unexpected complications; therefore, it may be advisable to work with a business attorney to draft and file the required documents.
Your minimum total filing fee for this process will likely be $425, which includes a minimum fee of $350 for filing the articles of conversion and a minimum fee of $75 for filing the articles of organization; various additional services will increase the filing costs. Filing fee information is included with the instructions on the articles of conversion form and articles of organization form.
Keep in mind that Nevada’s conversion statute states not only that title to all of the corporation’s property, as well as all of the corporation’s liabilities, are automatically transferred to the new LLC, but also that any pending legal actions against the corporation may continue against the LLC “as if the conversion had not occurred,” or the LLC may be substituted for the corporation as a party. For more information, check NRS § 92A.250(3).
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 for 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 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 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.