The details of how to convert your New Jersey limited liability company (LLC) to a New Jersey 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, New Jersey is one of only about fifteen states that do not allow statutory conversions of LLCs to corporations. Instead, New Jersey 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.
New Jersey'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 New Jersey's merger statute. As in most states, New Jersey 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 14A:10-1 through 14A:10-14 and Section 42:2B-20 of the New Jersey Statutes (N.J. Stat.).
To convert your New Jersey LLC to a New Jersey 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 elements are preparing a certificate of formation and bylaws; the certificate of formation will be filed with the Department of the Treasury. Through these formational documents, the members of your preexisting LLC will also become the shareholders of your new corporation. For more detailed information on forming a corporation in New Jersey, check How to Form a Corporation in New Jersey.
Step 2: Prepare a Plan of Merger
The plan of merger likely will contain items such as:
However, because New Jersey's merger statute for LLCs does not specify what a plan (or agreement) of merger must contain, you should consult with a business attorney regarding this document. (The items listed here are based on New Jersey's merger statute for corporations.)
Step 3: LLC Approval of Plan
On the LLC side of this transaction, the plan generally must be approved by a greater than 50% of the LLC ownership. For more details, check N.J. Stat. § 42:2B-20(b).
Steps 4 and 5: Corporation Board and Shareholder Approval of Plan
On the corporation side of this transaction, the merger agreement must be approved by the board of directors and then approved by the shareholders. (For a small business, the directors may be the same people as the shareholders.) The rules for shareholder approval of the agreement of merger may vary depending on, among other things, when your corporation was formed and whether there are any merger approval provisions in your certificate of formation. In most cases, approval will require a simple majority of the votes of all outstanding shares entitled to vote on the plan, including a simple majority of votes in each separate share class entitled to vote on the plan, unless your certificate of incorporation requires a greater majority vote. However, because the variety of potential voting rules contained in the statute can be confusing, you should consider consulting with a business attorney for guidance. For more details, check N.J. Stat. § 14A:10-3. (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 a Certificate of Merger
The certificate of merger likely will include items such as:
However, because New Jersey's merger statutes do not provide clear guidance regarding mergers of LLCs into corporations, you should consult with a business attorney before attempting to file a certificate of merger. (The Department of Treasury provides a blank certificate of merger form online. This form may not be appropriate for use in mergers involving both corporations and LLCs.)
Other Important Advice
In short, not only are mergers generally complex transactions, often involving unexpected complications, but New Jersey's merger laws are not as clear as you might expect. Therefore, as already stated, you are strongly advised to work with a business attorney to draft the required documents and otherwise complete the merger process.
Be aware that New Jersey's corporations merger statute states not only that all of your LLC's property, as well as all of its obligations and liabilities, are transferred to the new corporation, but also that all rights of creditors against your business remain unimpaired by the merger, and any legal actions against your business "may be enforced as if such merger . . . had not taken place." For more information, check N.J. Stat. § 14A:10-6—or consult with a business attorney.
Apart from the items mentioned in How to Form an LLC in New Jersey, one other important 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.
Tax Consequences
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.
Some Final Considerations
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.