The details of how you convert your Alabama limited liability company (LLC) to an Alabama corporation will vary depending on your specific situation. However, here is some general guidance on the process.
Alabama has a somewhat simplified procedure for converting your business from an LLC to a corporation. Technically known as “statutory conversion,” the procedure 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. (As the conversion statute puts it, a converted entity [the new corporation] “is for all purposes the same entity that existed before the conversion.”)
Because the majority of states allow for statutory conversion, it is worth noting that Alabama’s conversion statute is different from the conversion statutes of most other states in several respects. First, unlike many other states’ conversion statutes, Alabama’s statute includes language regarding “termination” of a business entity prior to conversion; however, personnel at the Secretary of State caution that you should not dissolve your LLC. Second, unlike other states, many documents needed to create new business entities are not filed with the Secretary of State or similar state office, but instead with the Office of the Judge of Probate in the appropriate county. However, you should file your conversion documents directly with the Secretary of State, who will then transmit copies to the appropriate Judge of Probate. The conversion procedure is codified primarily in Section 10A-1-8.01 of the Code of Alabama (Code of Ala.).
To convert your Alabama corporation to an Alabama LLC, you need to:
By default, the Alabama conversion statute requires approval of the conversion by all LLC members. However, the statute also allows for the possibility that alternative voting requirements are laid out, for example, in the LLC’s certificate of formation or operating agreement. For more details, check Code of Ala. § 10A-1-8.01(a)(1)b.
You can obtain information on the name reservation process by visiting this webpage on the Alabama Secretary of State’s website.
A certificate of formation generally is necessary to form a corporation in Alabama regardless of whether the corporation is formed as part of a statutory conversion. A standard certificate of formation will contain basic information about your new corporation, such as:
In addition, a certificate of formation filed as part of a statutory conversion also must include:
And, finally, you must attach a copy of the name reservation certificate for your corporation to the certificate of formation.
At this time, there is no certificate of formation form available for download that includes blanks for entering all of the necessary information for a statutory conversion. However, the Secretary of State currently does have a draft version of such a conversion form in Microsoft Word format; they should be able to e-mail you a copy of this form upon request.
While the special certificate of formation, the name reservation certificate, and the underlying approval process, may appear straightforward, converting your particular business may involve unexpected complications. Moreover, as already mentioned, there are some unusual elements under Alabama’s law. Therefore, you should strongly consider contacting a business attorney for assistance.
There are several potential filing fees involved in this process. Filing the certificate of formation involves a $25 fee payable to the Secretary of State plus an additional fee for the Probate Court where you’ll file the form. (The Secretary of State’s draft conversion form states that you should contact the Probate Court regarding their fees). Online name reservation costs $28 (or $27 if you are an Alabama Interactive subscriber).
Alabama’s conversion statute states that title to all of the LLC’s property, as well as all of the LLC’s debts and liabilities, are automatically transferred to the new corporation, and that any legal actions against the LLC may continue “as if the conversion had not occurred,” or the new corporation may be substituted for the LLC as a party. For more information, check Code of Ala. § 10A-1-8.01(d).
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 conversion.
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 adviser before undertaking any conversion.
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.