The details of how you convert your Utah limited liability company (LLC) to a Utah corporation will vary depending on your specific situation. However, here is some general guidance on the process of conversion to a for-profit corporation. The specific tax consequences for LLC-to-corporation conversions vary from one case to the next and can be significant, so you should consult with a tax adviser before undertaking any conversion.
Utah’s Conversion Statute
In Utah, 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 Department of Commerce. 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 Utah’s conversion statute, your business in the new form of a corporation is considered to be “the same entity as” your converted LLC.
Please Note: Changes to key sections of Utah’s conversion laws will go into effect on July 1, 2013. This article is based on the current version of the conversion laws. The current conversion procedure is codified primarily in Sections 16-10a-1008.7 and 48-2c-1406 of the Utah Code.
To convert your Utah LLC to a Utah corporation, you need to:
Unlike some other states with conversion statutes, Utah does not specifically require you to prepare a separate “plan of conversion” or similar document in order for your LLC to approve the conversion.
In order to determine the procedure that your LLC should use to approve the conversion, you should first look at the LLC’s operating agreement; if it provides rules for authorizing a conversion, you should follow those rules. If the operating agreement contains no rules for approving a conversion, you should use any rules in the agreement for authorizing a merger. (A merger is a different legal process from a conversion.) Finally, if there are no provisions in your operating agreement for approving either a conversion or a merger—and the agreement does not specifically prohibit conversions—then approval will require the unanimous consent of all LLC members. For more information, check Utah Code § 48-2c-1406 (1).
The articles of conversion contain key information about the conversion, including such items as:
A blank articles of conversion form is available for download from the Department of Commerce.
The articles of incorporation for your new corporation will include:
For your convenience, the Department of Commerce publishes a blank articles of incorporation form.
The articles of conversion and articles of incorporation may appear straightforward. However, keep in mind that you need to learn the proper procedure for having your LLC approve the conversion. Moreover, converting your particular business may involve unexpected complications. Therefore, it may be advisable to work 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 $37, which is the cost for filing the articles of conversion including the articles of incorporation.
Compared to most other states with conversion statutes, Utah uses unusual language regarding the transfer of your LLC’s property, as well its debts, liabilities, and duties, to the new corporation. Most other states clearly indicate that all of an LLC’s property, debts, liabilities, and obligations “continue” as property, debts, liabilities, and obligations of the new corporation—and also that any legal actions against the converting LLC may be continued against the business after its conversion into a corporation. In fact, the new version of Utah’s conversion statute that comes into effect on July 1, 2013 includes just this kind of standard language. However, in its current form, the Utah statute uses somewhat ambiguous language regarding the “transfer” (or, rather, non-transfer) of debts, liabilities, and duties, and does not include any explicit reference to lawsuits. The relevant section of the statute is Utah Code § 48-2c-1406(2), but if you have concerns about these matters, you should consult with a local attorney.
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, see Nolo’s 50-State Guide to Converting an LLC to a Corporation.