The details of how to convert your Illinois limited liability company (LLC) to an Illinois 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, Illinois is one of only about fifteen states that do not allow statutory conversions of LLCs to corporations. Instead, Illinois 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.
Illinois'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 Illinois's merger statutes. As in most states, Illinois has one merger statute under its LLC laws and another merger statute under its corporations laws; 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 5/11.39 through 5/11.50 and 180/37-20 through 180/37-35 of Chapter 805 of the Illinois Compiled Statutes (ILCS).
To convert your Illinois LLC to an Illinois corporation via a statutory merger, you need to:
Step 1: Create a Corporation
Creating a corporation is a multi-step process. However, for immediate purposes, the key points are preparing articles of incorporation and bylaws; the articles of incorporation will be filed with the Secretary of State. Through these organizational documents for the corporation, the members of your preexisting LLC will also become the shareholders of your new corporation. For more detailed information on forming an LLC in Illinois, check How to Form a Corporation in Illinois. Note: Initially, the name of your LLC cannot also be used as the name of your new corporation, because the Secretary of State will not allow two Illinois business entities to have the same name. 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:
Step 3: LLC Approval of Plan
On the LLC side of this transaction, the plan of merger must be approved either by all LLC members, or by a number or percentage of members as specified in the LLC's operating agreement. For more details, check 805 ILCS 180/37-20(c).
Steps 4 and 5: Corporation Board and Shareholder Approval of Plan
On the corporation side of this transaction, the plan of merger must be adopted by a majority vote of the board of directors, and then approved by the shareholders. (For a small business, the directors may be the same people as the shareholders.) By default, shareholder approval of the plan of merger requires at least two-thirds of the votes of the shares of each class or series of shares entitled to vote on the plan, and two-thirds of the votes of the total shares entitled to vote on the plan. However, the statute allows for the possibility that the articles of incorporation may provide for different voting requirements; those alternate provisions will apply so long as they continue to require some form of majority vote. For more details, check 805 ILCS 5/11.20. (Generally speaking, where the corporation is formed for the primary purpose of the merger, and the members of the LLC are also the shareholders of the corporation, it should be the case that all shareholders will approve the merger.)
Step 6: File Articles of Merger
The articles of merger—to which your plan of merger will be attached—will repeat some of the same information as the plan of merger, as well as a few other items. More specifically, the articles of merger will include:
A blank articles of merger form specifically for mergers between Illinois corporations and LLCs is available for download from the Secretary of State.
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 probably will be about $275, which includes a minimum $175 for filing articles of incorporation for the new corporation—although this amount can be higher depending on initial capitalization—and $100 for filing the articles of merger, including the plan of merger.
Illinois's corporations merger statute states not only that all of your LLC's property, as well as all of its debts, liabilities, and other obligations, are transferred to the new corporation, but also that any legal actions against your business may continue "as if the merger had not occurred," or your new corporation may be substituted for your old LLC as a party in such actions. For more information, check 805 ILCS 5/11.50.
Apart from the items mentioned in How to Form an LLC in Illinois, one other key 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 an 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.
Additional Reading and Guidance
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.
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.