The details of how to convert your North Carolina limited liability company (LLC) to a North Carolina 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. Because the tax consequences can sometimes be significant, you should consult with a tax adviser before undertaking any conversion.
In North Carolina, you can use a relatively new, simplified procedure that allows you to convert your business from an LLC to a corporation largely by filing a few basic documents with the Secretary of State. This procedure, technically known as “statutory conversion,” 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. By the same token, there is also no need to dissolve your LLC. Instead, under North Carolina’s conversion statute, your business “continues in existence as the resulting business entity [i.e., as the new corporation].”
The conversion procedure is codified primarily in Sections 57C-9A-01 through 57C-9A-04 of the North Carolina General Statutes (N.C.G.S.), which are sections of the state’s LLC Act. Note that many of the same basic conversion rules are repeated in the state’s Business Corporation Act at N.C.G.S. § § 55-11A-10 through 55-11A-13.
To convert your North Carolina LLC to a North Carolina corporation, you need to:
The plan of conversion contains key information about the conversion, including such things as:
By default, approval of the plan of conversion is based on whatever rules may be contained in your LLC’s articles of organization or operating agreement. However, if these documents contain no provisions for approving a conversion, then approval requires unanimous consent of all LLC members. For more details, check N.C.G.S. § 57C-9A-11.
The articles of conversion, which you need to include with you articles of incorporation, contain only a few items, including much of the same information as the plan of conversion. Specifically, the articles of conversion must include:
The articles of incorporation for your new corporation (which will include the articles of conversion) will also contain the following information:
For your convenience, the Secretary of State publishes a blank form that combines, in a single document, the articles of conversion and articles of organization. You can download the form (B-01A Articles of Incorporation Including Articles of Conversion) from this Secretary of State webpage.
The plan of conversion, articles of conversion, and articles of incorporation all may appear straightforward; however, converting your particular business may involve unexpected complications. Therefore, you should strongly consider working with a business attorney to draft the required documents and otherwise complete the conversion process.
Your minimum filing fee for this process likely will be $125, which is the cost for filing the articles of organization including the articles of conversion.
Be aware that North Carolina’s conversion statute states not only that all of your LLC’s property, as well as all of its liabilities, are automatically transferred to the new corporation, but also that any legal actions against your business may continue “as if the conversion did not occur.” For more information, check N.C.G.S. § 57C-9A-13.
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 entity change.
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.
Other Considerations and Information
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.