As the state of business changes, so may the corporate status that the business currently holds. It’s not unusual for a limited liability company, or LLC, for example, to go the business conversion route of changing their structure to a corporation or vice versa. However, in some cases, corporations may decide to switch to LLC status instead. Both of these business conversions are possible, but how do they work?
From One Type to Another
It’s important to understand that there is a critical difference between the tax status and legal structure of a corporate entity. For example, with proper work from an accountant, an LLC can change its tax structure from an S Corp to a C Corp when new members are added; this is a comparatively simple administrative change. However, changing the legal structure of an LLC to corporate status is a more comprehensive evolution that, in addition to changing the tax structure, changes the commitments, executive function, and legal nature of the company. This requires far more paperwork and processing for legal state recognition of the complete structural change at the corporate entity level, not just for tax purposes.
Understanding your current LLC status and your desired new corporate status is critical to easy and straightforward business conversions.
Corporations to LLCs
While there is an established framework of business conversions for corporations to switch to LLCs, this process is more complex than the traditional LLC-to-corporation route. With the older, traditional method, a new LLC is usually formed, and the corporation is dissolved, with the corporation’s assets transferred over to the new corporate entity. So in this sense, it’s not quite the same as the original corporate organization just “upgrading” or “promoting” so much as a new business organization that assumes some aspects of the previous business. However, there are now options in some circumstances where dissolving is not required, but this depends on the business’s state.
Conversions from corporations to LLCs do have some benefits for businesses. A common reason for business conversions from corporations to LLCs is to avoid double taxation. There are two forms of taxation for corporations that are large enough to have shareholders. The company is first taxed on the income it earns, then taxed again when profits are passed to shareholders.
LLCs, however, have options for “pass-through taxation,” where taxes are not applied until profits are directly in the hands of members. This can sometimes be a much better option for people to share profits in smaller numbers with fewer complications.
In either case, business conversions can be handled by the owners themselves, or they can consult with other companies that specialize in helping growing businesses to move onto their next phase of expansion fully compliant with state and federal requirements.