Converting A Corporation to LLC
Business owners often wonder whether they have the right tools to succeed. The most popular business entity and structure used to be the corporation, but has switched to the limited liability company (LLC) in recent years. This is a guide for those Oklahoma business owners looking to convert their corporation to an LLC. This decision can significantly impact your business operations, taxation, and legal liability.
Contact the Oklahoma business lawyers at Avenue Legal Group for help with this conversion, or get answers about whether this switch is right for your business.
Understanding the Benefits of Converting to an LLC:
It is essential to understand why many business owners choose to convert from a corporation to an LLC. Here are some of the key benefits:
- Limited Liability Protection. Both corporations and LLCs offer limited legal liability for their owners and members. This means that your personal assets are generally protected from business debts and legal actions. However, LLCs offer greater flexibility in terms of simple management and profit distribution.
- Pass-Through Taxation. One of the most attractive features of an LLC is the pass-through taxation. Unlike corporations, which can face double taxation (at the corporate level and again on dividends), LLCs allow profits and losses to pass through directly to the owners’ personal tax returns, simplifying the tax process and avoiding the corporate level tax.
- Reduced Compliance Requirements. LLCs have significantly fewer regulatory and compliance requirements than corporations. This can result in lower administrative costs and a much more straightforward operational structure. For family-owned businesses, the decision to use an LLC should be the correct answer.
- Greater Management Flexibility. An LLC can be managed by its members (owners) or designated (hired) managers, which provides more flexibility in how your business is run compared to more rigid structures of corporations. If desired, an LLC can even operate like a corporation with elected officers and a board of directors, but the LLC structure is flexible enough to allow small-scale operation as well.
Key Considerations Before Converting Your Corporation to an LLC:
Here are the key factors you should weigh when considering this change.
- Existing Liabilities. Ensure that you understand any existing liabilities as they are currently tied to your corporation. Converting to an LLC does not eliminate those liabilities, and they may carry over to the new entity.
- Ownership Structure. Evaluate how the change in structure might impact ownership rights. LLCs allow for a different distribution of profits and management roles compared to corporations. This often requires a complete overhaul of governance documents such as the ownership agreement, shareholder agreement, and operating agreement.
- Tax Implications. Consult with a tax professional to understand how converting may affect your tax situation. In some cases, there may be immediate tax consequences associated with conversion of an entity. There is some risk that the taxing authority views the conversion as a liquidation of the corporation and reacquisition of all assets by the new LLC.
- State and Federal Compliance. Ensure you comply with both Oklahoma state laws and federal regulations alike throughout the conversion process. Obviously, having an experienced lawyer on your team for the conversion gives you the best security available.
How to Convert An Oklahoma Corporation to An LLC:
- Conduct a Thorough Assessment. Before initiating the conversion process, conduct a comprehensive assessment of your corporation. Review your bylaws, financial statements, and any existing contracts to ensure a smooth transition would take place. During this time, it is important to meet with both financial and legal professionals to ensure all possible conflicts are explored.
- Obtain Necessary Approvals. Depending on your corporation’s structure and current business agreements, you may need to obtain approval from your board of directors, shareholders, top customers, and other stakeholders. This may involve holding a formal meeting and voting on the proposed conversion.
- File a Plan of Conversion. In Oklahoma, a Plan of Conversion must be filed with the Oklahoma Secretary of State to initiate the conversion. The plan must outline the terms of the conversion and include: (1) the name of the corporation, (2) the name of the new LLC, and (3) a statement that all necessary parties approved the conversion. Your attorney can ensure that all necessary elements of this Plan are properly stated.
- Prepare and File Articles of Organization. Once the Plan of Conversion is approved, you must file Articles of Organization for your new LLC. This document must include: (1) the LLC’s name, (2) the address of the office of the principal, (3) the name and address of the registered agent, and (4) the duration of the LLC, if not perpetual. Consult with a business attorney to ensure that your Articles of Organization include all necessary elements and are properly filed.
- Obtain an Employer Identification Number (EIN). After your LLC is established, you’ll need to obtain a new Employer Identification Number (EIN) from the IRS. This number is critical for tax purposes and the hiring of employees.
- Update All Business Licenses and Permits. Check with your local and state authorities to ensure you update any and all necessary business licenses and related permits to reflect your business’s new status as an LLC.
- Notify Creditors and Other Stakeholders. Often, entities converting will need to inform their creditors, vendors, customers, partners, and any other stakeholders about the conversion. This transparency helps maintain good business relationships and ensures that all parties involved with the entity are aware of the status change.
- Review and Update Contracts. Review any existing contracts alongside a qualified business attorney to determine whether they need to be amended to reflect the change in business structure. This may involve renegotiating terms or updating signatures.
- Consider an Operating Agreement. Though an LLC operating agreement is not required to be filed publicly in the State of Oklahoma, drafting an operating agreement for your LLC is highly recommended for numerous purposes – legal and otherwise. This document outlines your management structure, rights, and responsibilities of members, providing clarity for your business operations. Speak to a trusted business attorney about what specific terms and structures of an operating agreement will best suit the business going forward.
- Maintain Compliance. Once the conversion of your entity is complete, ensure you remain compliant with Oklahoma state laws regarding LLCs and your business operations. This includes filing annual reports and paying necessary fees in a timely manner, among other items.
Common LLC Conversion Pitfalls to Avoid:
As with all business decisions, there are key pitfalls that can negatively impact your conversion or your the well-being of your business.
- Neglecting Tax Considerations. Failing to consult with a tax professional can lead to unexpected tax consequences. Always make sure to understand how the conversion will impact your tax obligations.
- Not Updating Legal Documents. Neglecting to update contracts, leases, and other legal documents can lead to confusion and legal issues with potentially serious consequences. Always ensure your company paperwork reflects the proper status of your entity, whether LLC, corporation, or otherwise.
- Overlooking Compliance Requirements. Ensure you meet all compliance requirements on the local, state, and federal level for both your new LLC and any continuing obligations from your corporation. This will ensure you avoid any possible fines or penalties.
Oklahoma Business Lawyers
Converting an Oklahoma corporation to an Oklahoma LLC can be a strategic move that offers various benefits, including limited liability protection, pass-through taxation, and reduced compliance requirements. If you are considering making the switch, consulting with a qualified attorney can provide valuable insights and ensure you navigate the conversion smoothly. The Avenue Legal Group team is always ready to assist you throughout this process, ensuring that you make informed decisions for your business’s future.
Ready to convert your Oklahoma corporation to an LLC? Contact the experienced attorneys at Avenue Legal Group to schedule a consultation and take the first step towards more the best structure for your business.
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