The details of how to convert your South Dakota limited liability company (LLC) to a South Dakota 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 sometimes significant, you should consult with a tax adviser before undertaking any conversion.
South Dakota’s Conversion Statute
In South Dakota, 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. The conversion procedure is codified primarily in Sections 47-1A-901 through 47-1A-957 of the South Dakota Codified Laws (S.D. Cod. Laws).
To convert your South Dakota LLC to a South Dakota corporation, you need to:
Your plan of conversion will likely contain such key pieces of information about the conversion as:
However, South Dakota’s conversion statute does not clearly address the content for a plan of conversion for an LLC. The items listed here are adapted, variously, from those required when the converting entity is a corporation, and when an LLC is involved in a merger (a merger is legally distinct from a conversion). You should strongly consider consulting with an attorney to ensure you are preparing a proper plan of conversion for your LLC.
By default, South Dakota’s conversion statute requires LLC approval of the plan of conversion under the same rules that would apply to LLC approval of a merger. More specifically, unless your LLC’s operating agreement provides otherwise, all LLC’s members must consent to the conversion. However, your operating agreement may permit approval based on the consent of a lower number or percentage of members. For more details, check S.D. Cod. Laws § 47-34A-904(c).
The articles of entity conversion must include:
At this time, the Secretary of State does not have a blank form or template for the articles of entity conversion; you will have to draft your own.
The articles of incorporation will include basic information about your new corporation, including:
For your convenience, the Secretary of State publishes a blank articles of incorporation form.
The articles of entity conversion and articles of incorporation may appear straightforward; the rules for drafting the plan of conversion, however, may be less so, and may require you to prepare bylaws for your new corporation. More generally, converting a business often involves 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 $150, which is the cost for filing the articles of entity conversion including the articles of incorporation.
Be aware that South Dakota’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 continue “as if the conversion had not occurred.” For more information, check S.D. Cod. Laws § 47-1A-955.
The foregoing information explains the basic steps for converting from LLC to 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.