Converting to an LLC - Explained
Changing Business Entities
Written by Jason Gordon
Updated at September 25th, 2021
- Marketing, Advertising, Sales & PR
- Accounting, Taxation, and Reporting
- Professionalism & Career Development
-
Law, Transactions, & Risk Management
Government, Legal System, Administrative Law, & Constitutional Law Legal Disputes - Civil & Criminal Law Agency Law HR, Employment, Labor, & Discrimination Business Entities, Corporate Governance & Ownership Business Transactions, Antitrust, & Securities Law Real Estate, Personal, & Intellectual Property Commercial Law: Contract, Payments, Security Interests, & Bankruptcy Consumer Protection Insurance & Risk Management Immigration Law Environmental Protection Law Inheritance, Estates, and Trusts
- Business Management & Operations
- Economics, Finance, & Analytics
- Courses
Table of Contents
What is Converting a business entity to an LLC?How to Convert a Partnership to an LLC?Academic ResearchWhat is Converting a business entity to an LLC?
Converting from one business entity to another varies in complexity based upon the original type of entity.
The first step is forming a new LLC. Forming an LLC as a sole proprietorship is extremely simple.
Next, the assets of the sole proprietorship simply need to be transferred to the new LLC entity. The question becomes how to get the assets out of the old entity and into the new LLC.
How to Convert a Partnership to an LLC?
Converting from a partnership to an LLC is also relatively simple. There are several options for funding the LLC.
One option is liquidating the partnership interest of each partner and then having the partners donate the assets to the LLC.
Another option is simply having each partner donate her interest to the LLC and then liquidating the partnership.
Both options have varying tax repercussions.
When converting from a corporate entity to a partnership, avoiding negative tax repercussions and accounting for the change in entity form can be very complicated.
The process generally requires that the corporation be liquidated. This can give rise to very negative tax consequences for the shareholders.
In any event, an S-Corporation cannot be donated to a business entity. This will destroy the S-election status.
A C-corporation can be held by an LLC, but the double tax structure for the C-corporation causes this arrangement to lose the benefits of LLC status.
The tax aspects of converting entity forms are discussed further in other material.
Back To: BUSINESS ENTITIES, CORPORATE GOVERNANCE, & OWNERSHIP
Related Topics
- What are the main characteristics of a Limited liability company?
- Forming an LLC
- Articles of Organization
- Operating Agreement or LLC Agreement
- Why You Need an LLC Agreement
- LLC Compensation of Members
- LLC Taxation
- Converting to an LLC
