Converting Your Corporation to an LLC

Converting Your Corporation to an LLC

By: Alyssa Ziegenhorn

There are many factors that go into choosing what type of entity you want to form for your business. We discussed some of these factors in an earlier article.

However, sometimes things change. Maybe your business has pivoted the type of services it offers, maybe you are looking for investors, or perhaps you have decided to scale things back.

It’s not uncommon for a business that starts as an LLC to convert into a corporation down the line.

But what happens when you start out with a corporation and find it is no longer serving your needs?

Maybe you originally envisioned going after institutional funding, but have decided it’s better to bootstrap your organization for now(or your revenue is such that the business is self-supporting). Perhaps you anticipated bringing on additional founders and advisors, but realize you prefer to keep the circle small.

Whatever the reason, you may decide that the increased overhead and administrative load that comes with managing a corporation no longer makes sense for your business. Instead of winding down the business and starting a new entity, you may want to convert your California or Delaware corporation into a limited liability company.  

Step One: Get consent from the Board of Directors and your shareholders.

Generally, a conversion can be approved with a majority vote for both the Board and the shareholders. However, you should check your company bylaws and any shareholder agreements you might have to ensure you comply with any special requirements.

Board approval can be voted on at a special meeting of the Board of Directors, or by written consent, but keep in mind that a vote by written consent must be unanimous ( all directors approve). If you aren’t able to contact all the company’s directors, or get them to agree to conversion, you will have to hold an in-person or virtual meeting in accordance with your company bylaws.

Shareholder approval can usually be given in writing as well, and both California and Delaware law allow for a shareholder vote in writing to be effective as long as a majority of shareholders vote. If the vote is not unanimous, however, written notice of the decision must be given promptly to any non-voting shareholders.

Step Two: Prepare the Plan of Conversion.

The Plan of Conversion will go over the details of converting the corporation to a limited liability company. This includes what state’s law the LLC will be organized under, the date of conversion, the name of the LLC, and how the outstanding stock interest in the corporation will convert into membership interest in the LLC.

Step Three: File conversion with the state(s).

Once the Board and Shareholder approvals are complete, you will need to file a Certificate of Conversion with the state your corporation was formed in. If you are converting your corporation to an LLC in a different state (for example, converting a Delaware corporation to a California LLC), you will also need to file with the new state.

Step Four: Draft an operating agreement.

The operating agreement is the primary document of an LLC and lays out the structure and rules governing the LLC, similar to the bylaws of a corporation. A signed copy should always be kept on file in case the company is ever sued or audited.

Step Five: Update the IRS.

Depending on the specifics of your conversion, you may need to obtain a new EIN (Tax ID Number) from the IRS. You should check with your CPA or tax advisor to determine if a new EIN is needed. If you do not need anew EIN, you will need to file Form 8822-B (Change of Address or Responsible Party – Business) with the IRS to update the name of your company.

Step Six: Update your business license and fictitious business name statement.

Most cities require that you register for a business license account when doing business in the city. This includes having your business address there, even if you do not have a physical location. If you have an existing business license, you will need to update your account with the new name of the LLC. If you are changing the business address, you will likely need to register for a new business license account.

If you have registered a fictitious business name (sometimes called a DBA), or want to add a new one, you will need to file a new fictitious business name statement with the county your business address is located in.

Considering a corporation to LLC conversion? We help small businesses and startups make informed entity decisions. Contact us at (415) 633-6841 or info@bendlawgroup.com to discuss your options.

Disclaimer: This article discusses general legal issues and developments. Such materials are for informational purposes only and may not reflect the most current law in your jurisdiction. These informational materials are not intended, and should not be taken, as legal advice on any particular set of facts or circumstances. No reader should act or refrain from acting on the basis of any information presented herein without seeking the advice of counsel in the relevant jurisdiction. Bend Law Group, PC expressly disclaims all liability in respect of any actions taken or not taken based on any contents of this article.