Converting into 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. The assets of the sole proprietorship simply need to be transferred to the new LLC entity.
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 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 is discussed further in the Startup Accounting Resources.