The details of how to convert your New York limited liability company (LLC) to a New York 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 York is one of only about fifteen states that do not allow statutory conversions of LLCs to corporations. Instead, New York 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 York’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 York’s merger statute. As in most states, New York 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 901 through 906 of Article 9 of the New York’s Business Corporations laws (NY CLS Bus. Corp.) and Sections 1001 through 1004 of Article 10 New York’s Limited Liability Company laws (NY CLS LLC).
To convert your New York LLC to a New York 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 incorporation and bylaws; the certificate of incorporation will be filed with the Department of State. 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 York, check How to Form a Corporation in New York. Note: Initially, the name of your LLC cannot also be used as the name of your new corporation. 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 must be approved by whatever percentage of members is required by the LLC’s operating agreement, so long as at is at least a simple majority. If the operating agreement has no provision for approving mergers, then approval requires a simple majority vote of member interests. For more details, check NY CLS LLC § 1002.
Steps 4 and 5: Corporation Board and Shareholder Approval of Plan
On the corporation side of this transaction, the agreement 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 well be the same people as the shareholders.) The rules for shareholder approval of the agreement of merger will vary depending on, among other things, when your corporation was formed and whether there are any merger approval provisions in your certificate of incorporation. In many cases, approval will require at least two-thirds of the votes of all outstanding shares entitled to vote on the plan, unless your certificate of incorporation requires a lesser 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 NY CLS Bus. Corp. § 903. (Generally speaking, where the corporation is formed for the primary purpose of the merger, and the LLC members are also the corporation shareholders, it should be the case that all shareholders will approve the merger.)
Step 6: File a Certificate of Merger
The certificate of merger will repeat some of the same information as the plan of merger, as well as a few other items. More specifically, the certificate of merger will include:
The certificate of merger must also be headed with the phrase “Certificate of Merger of [name of your LLC] and [name of your new corporation prior to merger] into [name of your corporation after merger] under Section 904 of the Business Corporation Law." While the Department of State provides a blank cover sheet containing the latter phrase, it does not publish any blank form or template for the complete certificate of merger; instead, you will have to draft your own. The filing address for the certificate of merger is listed on a Department of State webpage.
Other Important Advice
Some people may consider the formation of the new corporation, the plan of merger, the plan approval process, and the certificate 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 will depend in part on the number of shares the new corporation is authorized to issue, but probably will be at least $195, which includes a minimum $135 for filing the certificate of incorporation and $60 for filing the certificate of merger.
New York’s corporations merger statute states not only that all of your LLC’s property, as well as all of its debts, liabilities, and obligations, are transferred to the new corporation, but also that any legal actions against your business “may be enforced, prosecuted, settled or compromised 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 NY CLS Bus. Corp. § 906.
Apart from the items mentioned in How to Form a Corporation in New York, 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.
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.
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.