Advantages of Converting Your Closely Held Corporation to a Limited Liability Company
January 21st, 2014
Owners of closely held corporations — corporations whose stock is held by only a few individuals or family members — may find many advantages to converting their corporation to a limited liability company, also known as an LLC.
Many of the corporations that would benefit from converting to an LLC were formed before the limited liability company was available as a form of business organization. Others may have experienced a change in circumstances or expect a change in circumstances, such as the need to sell or recapitalize the business, so that an LLC makes more sense. The LLC business structure offers a number of benefits over C and S corporation structures, especially in the taxation and estate planning arenas.
The LLC structure provides the best combination of liability protection for owners, control and flexibility for closely held companies. Advantages that may be obtained by converting a closely held corporation to an LLC include the following:
- Limited liability veil for shareholders maintained and in some cases improved
- No limitations on number of shares or type of shares that may be created
- No limitations on who may own shares of an LLC • Avoid Ohio’s Commercial Activity Tax (or franchise tax in other states) if taxed as a partnership
- Discounts may be available on transfer of interest in an LLC that are not available to a corporation
- Discounts on transfer of interest/stock due to lack of marketability may be deeper for and LLC than for a corporation
- Obtain charging order protections
- Eliminate federal income tax at business level when converting from C corporation – NO double taxation
Converting Your Corporation to an LLC in Ohio
When the limited liability company structure first became available in Ohio, there were only two ways to convert a corporation to an LLC. Both involved forming a separate LLC and then eventually dissolving the corporation. In one approach, the assets of the corporation were sold to the LLC. In the other approach the corporation was merged into the LLC. Both approaches were somewhat clumsy and typically resulted in significant additional taxes being paid on “gains” the IRS perceived shareholders to be receiving through the merger process or by selling assets.
Since then Ohio legislature created a new way to convert corporations to limited liability companies called a Statutory Conversion. A statutory conversion is much more streamlined and many of the taxes involved in converting are eliminated because, according to the language of the law, the old corporation is “continued in” the new LLC, so the shareholders are not perceived to be receiving any gain during the conversion process. A statutory conversion also permits carrying forward net operating losses and use of the same federal and state tax identification numbers, so that those advantages are not lost in the conversion as they might be under other conversion methods.
While a new operating agreement must be drafted, along with other conversion documents, and accepted by the board of directors, the process does not involve forming a new LLC. Nor does it involve dissolving the old corporation. In fact, making the mistake of doing either could result in triggering the taxes that a statutory conversion is intended to avoid.
Any corporation considering converting to an LLC should have the assistance of an experienced business planning attorney to ensure that costly mistakes are avoided and the conversion results in the desired advantages. A business attorney familiar with the intricacies of Ohio limited liability company and corporation entity structures can help a business owner identify whether converting their corporation to an LLC would be advantageous.
In Ohio, the business planning attorney’s office of Gudorf Law Group, LLC, can help business owners determine whether converting their corporation to an LLC would be advantageous and assist those companies in the conversion process to ensure the best results possible. Call our office at 1-877-483-6730 to schedule a free consultation.