converting s corp to llc

Not so long ago, the go-to model for businesses was the corporation, and more specifically the C corporation. Savvy business owners may have elected the S corporation to add the pass-through tax benefits of a partnership to the limited liability of corporations.

These days the go-to business model is the limited liability company (LLC). It unites a partnership-like tax treatment and governance structure with the limited liability of a corporation. Further, unlike the S corporation, LLCs have no restrictions on ownership or ownership structure. 

“Sometimes the business entity that owners begin start out with is not the best entity for the business or the owners.”

Business Attorney Trevor Brewer

You may have started your business when corporations were the only real option. Now you want to move to an LLC to get more nimble in business and benefit from better tax treatment. Fortunately, Florida provides a straightforward process in its statutes on how to convert a corporation to an LLC in Florida. Below are 8 Steps, broken into 3 Parts, to convert your C or S corporation into an LLC.  

Florida Law

The Florida Business Corporations Act provides a specific mechanism for converting your domestic (Florida) corporation into a domestic (Florida) LLC. The procedure, known as “statutory conversion,” creates a new domestic LLC through the existing corporation in a single set of filing documents. It dispenses with the independent dissolution of the corporation and the separate creation of the LLC, and the related wind down and wind up of two independent businesses. However, statutory conversion requires specific corporate actions taken in a certain order to properly implement the conversion. Detailed attention to governance and timing are critical to convert a corporation into an LLC under Florida law.

Part A: Corporate Matters

Conversion of a business’s entity structure from a corporation to an LLC requires approval from the highest levels of the business leadership and its ownership. Therefore, a proposed conversion initially rests with the board of directors (the Board), but approval must ultimately come from the shareholders. 

Step 1: Resolution of the Board of Directors

The Board, by vote at a properly called meeting or by  written resolution, recommends to the shareholders that the corporation convert to an LLC. The Board resolution needs to contain a proposed Plan of Conversion (the Plan) and Articles of Formation (the Articles) for the new LLC. The Plan should contain the following information:

  • The name of the corporation,
  • The name of the LLC, 
  • The organizing state of the LLC (in this case Florida), and
  • The terms and conditions of the conversion.  

Among other significant issues, the terms and conditions should address the conversion of corporate shares into LLC membership interests and the restructuring of management (e.g., corporate president becomes LLC manager etc.).

While the Florida Secretary of State provides some of the conversion forms, others need to be drafted.  

Step 2: Resolution of the Shareholders

The shareholders, also through a vote at a properly called meeting or by written resolution, approve the conversion and adopt the Plan and Articles. Again, it is important to ensure the validity of the shareholder meeting and the actions taken. The shareholders must approve the Plan and Articles prior to submission to the Florida Secretary of State.

Step 3: Filing the Certificate of Conversion

A properly authorized officer or director of the corporation then files a Certificate of Conversion (the Certificate) with the Florida Secretary of State. The Certificate must contain:

  • The name of the corporation,
  • The type of business the corporation is converting to (in this case an LLC),
  • The name of the LLC,
  • The organizing state of the LLC (in this case Florida),
  • The principal office of the LLC (even if it is the same as the corporation),
  • A statement that the Plan was approved pursuant to Florida law,
  • The effective date of the conversion,
  • A statement that the LLC will pay to shareholders with appraisal rights the amount that they are due (see Florida statute 607.1113), and
  • The signature of a duly authorized officer or director.

Given that the Certificate of Conversion is subject to approval by the Secretary of State, it is good practice to seek professional advice in preparing it.

Step 4: Acceptance of Conversion

Before any other external acts related to the conversion occur, confirm that the Secretary of State accepted the Certificate of Conversion. Once accepted, the new LLC is now the active business entity. The LLC will be treated as if it had always existed in the place of the old corporation, which is itself dissolved through no additional action.

Part B: LLC Matters

The LLC, as successor to the old corporation, must now sync the statutory conversion to the ongoing business. This includes matters related to commercial, government, insurance, and financial relationships. 

Step 5: Adopt an Operating Agreement

Like corporations, LLCs have their own formal governance structure, and these formalities should be respected. As such, the LLC should adopt an operating agreement to replace the discarded bylaws of the old corporation. The operating agreement will outline the governance of the LLC, including the powers and duties of its managers (formerly the corporate officers).

Step 6: Notify Commercial Partners

Even though the business operations were not interrupted by the conversion, the change of the core business entity can affect several relationships. The most basic change starts with the business name. While it may not be significant, the name needs updating with all commercial partners. This update will affect contracts, accounts, invoices, billing systems, login information, online services, and other basic operational relationships. It could also require amendments to, or assignments of, contracts, leases, real property deeds, and vehicle and equipment titles.

Step 7: Notify Government Agencies

Similar to notifying commercial partners, the business may hold licenses and permits from various state or federal agencies. All business licenses and permits need to be amended for, or assigned to, the new entity to remain active and valid.

Step 8: Notify Insurance and Financial Institutions 

The named insured on any insurance policies should be updated. The names of the LLC and the individuals authorized with banks and other financial institutions need to be synced to the new LLC. Delays in reconciling the conversion with both insurance providers and financial institutions can result in denial of coverage and limit access to funds.

Part C: Tax Matters

Conversion of a C corporation to an LLC can trigger significant tax consequences. The IRS usually considers C corporation conversion to an LLC a complete liquidation and sale of assets.  More than likely, significant tax consequences will result, which may include taxation at both the corporate and individual shareholder level. On the other hand, converting an S corp into an LLC should have less severe tax consequences, but still significant. Accordingly, it is critically important to understand the tax consequences of Florida statutory conversion prior to undertaking the process.

BrewerLong Can Guide You Through Corporate Conversion

At BrewerLong, our business attorneys have extensive experience in all facets of business law that touch on how to convert a corporation to an LLC in Florida. As you can see, there are many factors to take into account for a successful corporate conversion. They can range from contract assignments to significant tax consequences. BrewerLong’s attorneys can safely chart the course of corporate conversion to prevent business disruption and minimize tax consequences, ushering in a new chapter for your company.  

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