How to Change Your Business Entity
It doesn’t matter which business structure you choose to start your business as, it is easy to change the structure of your business as the things change in the company. So, it doesn’t matter if your business is an LLC, a Sole Proprietorship or otherwise, the business entity conversion is possible and makes sense when the things change in the company.
It has to be kept in mind that the procedure of the business entity conversion varies from state to state. You would need to contact the Secretary of State for details.
NOTE: The business entity conversion is an important choice which would affect your taxes and your legal liability. So, it is better to consult a lawyer to have a much clearer idea of what you are getting into and how to deal with it appropriately. You can easily have all your questions answered.
Even though all the states have a different method, here are some of the normal ways of how the business entity conversion takes place for various types of business entities:
Business Entity Conversion of a Corporation to an LLC
The business entity conversion of a C-corporation to a Limited Liability Company is conceivably one of the most expensive transformations in the business world. Yes, expensive where the exact cost of the company is decided whether or not there is a loss and by the value of the company assets.
The conversion is only possible after the corporation has been dissolved after which the LLC is formed with the assets of the corporation that was liquidated. Moreover, some states offer a more straightforward approach to the business entity conversion process. You would need to contact the Secretary of State to learn about the process in your state.
NOTE: In case there is any reorganization that doesn’t annul the first corporation completely, the IRS might scrutinize them with every result that comes out of it.
Business Entity Conversion of a Limited Liability Company or Partnership to a Corporation
This is a very different situation as compared to the one mentioned above for the business entity conversion as here you want to change a formalized business entity type to another formalized business entity. Example of this is – business entity conversion of a Limited Liability or a Partnership to a Corporation.
And for this to be accomplished, you would need to create a new Corporation and dissolve the old company that you have. But before you do this, check out the procedure for this with your Secretary of State as some states permit you to convert the business entity simply.
Moving to the next part of the conversion, the transfer of the liabilities and the assets to the new company is normally done via one of the following three ways:
- By contributing the LLC or Partnership shares to the Corporation;
- By allocating the liabilities and the assets to the owners, which are then given by them to the new Corporation;
- By undeviatingly transferring the liabilities and assets from the old business to the new Corporation.
In all the three methods explained above, exchange the capital interest that is in the old company for the corporate stock in the new one. Furthermore, the previous LLC or Partnership is deemed discontinued as soon as the assets are liquefied.
NOTE: Even though the conversions are tax free, the profits made during the process which includes the reduced liability, need to be reported and might be taxed as well.
Business Entity Conversion of a Corporation or LLC to a Sole Proprietorship or a Partnership
Usually, the most straightforward means to transform a company is to dissolve, and entirely liquidate the assets of, an LLC or Corporation, dividing the assets between the owners and/or the shareholders. As soon as a business is started, the sole proprietor status is given immediately to the company.
But if the company wants to become a partnership, there has to be a Partnership Agreement that would be signed by the partners to make the company a partnership. To know the exact process of the business entity conversion, in this case, visit the Secretary of State for more details on the entire process, since some states allow you to convert the business directly into the desired business structure without having to dissolve the company.
Business Entity Conversion of a Sole Proprietorship to Anything Else
Being a single person doing business, you started as a sole proprietor, and if you are hoping for the business entity conversion into any other business entity, you basically need to form a new business and contribute capital.
Moreover, the procedure of the business entity conversion into a Partnership is as simple as signing the Agreement for Partnership. But for the other advanced business organizations, like the Limited Liability Companies, or the Corporations (including the C-corps and the S-corps), the paperwork and effort needed are more.
In this business entity conversion, the least you would have to do is file the Articles of Organization or Incorporation with the relevant state authorities. On the other hand, the Corporations would also need to conduct a formal meeting of all the shareholders and set the Bylaws. Concerning the LLCs, they are often regulated in a manner that is less strict as compared to the Corporations.
It should be noted that the business entity conversion would have additional outcomes. Let us take for instance; in case you are operating a business that needs licensing, you might have to apply for getting a new license for the new company. Moreover, you need to make sure that you comply with the state and the local regulations by checking the laws with the Secretary of State and taking the advice of an attorney regarding the rules.
And if you are sure with everything and are moving ahead with the business entity conversion, you would need to register your business again and avail certain licenses. In this case, Inc Paradise can help you with it. Contact us to get more information!