Q.How can I convert my S Corporation to an LLC?
A.Technically a corporation cannot be converted into an LLC (although a general partnership and limited partnership can be converted into an LLC). However, there are four (4) other ways to accomplish this desired result:
- Create a new LLC, then merge the existing corporation into it.
- Create a new LLC and then have the existing corporation's shareholders contribute their stock to it in exchange for their membership interest in the LLC. The LLC will in turn become a holding company for the corporation, which continues to exist as a 'subsidiary' of the LLC.
- Liquidate the corporation by distributing all its assets to the shareholders as a liquidating dividend; then have the shareholders contribute those assets to a new LLC in exchange for their membership interests.
- Have the corporation itself contribute its assets to a new LLC in exchange for the corporation receiving the LLC's membership interests. The corporation can then be liquidated and the LLC membership interests will be distributed to the shareholders as a liquidating dividend.
Regardless of the method chosen, the I.R.S. will probably consider the corporation to have been liquidated and this may result in taxable income or gain to the liquidating corporation and/or the shareholders. In addition, for any year in which both the old corporation and the new LLC co-exist, each may be subject to the minimum franchise tax. You should therefore consult with your accountant or C.P.A. about the possible tax consequences and then inform your attorney which method you prefer.
You will also need to consider any problems that might occur with any corporate creditors, lessors, or other individuals with whom the corporation does business as leases and contracts will need to be assigned to the new LLC. For this reason, this type of "conversion" should not be attempted without both legal and accounting advice and guidance.
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