A few years ago, Marty and his partners opened a business: The Choccolocco Metal Fencing Company. They chose to form as a limited liability company or LLC. Now, as their business has grown, they wonder if another business entity would better suit their needs. They begin to explore the idea of converting their Alabama business from an LCC to a corporation.
Deciding Factors
The limited liability company structure has become one of the most popular business entity types in the country. Corporations, however, have a long history and, for some, offer the best structure. Let’s compare LLCs to Corporations in a few key categories:
- Formation. To form an LLC, one or more owners (called members) file articles of organization and usually prepare some type of operating agreement. Corporations also file formation documents with the state in which they are located. Shares are issued to shareholders and a board of directors is appointed to manage the corporation.
- Liability. LLC owners have some protection from liability, while avoiding the double taxation of the corporate structure. Corporations also provide liability protection to their owners – the shareholders.
- Taxes. LLCs are pass-through businesses. Income ‘passes through’ to the owners, who declare it on their personal tax return. Corporations, as separate entities, are taxed on their profits. Shareholders will also pay tax on any dividends they receive.
An LLC can convert to another business entity type, including corporate.
Steps to Take
According to Alabama law, all of the members of an LLC must approve of the terms and conditions of the conversion. Then, the LLC can do the following to convert:
- Get a name reservation certificate for the new LLC from the Secretary of State.
- File a certificate of formation, a statement of conversion, along with the name reservation certificate, with the Secretary of State’s office.
Please note that it is not necessary or recommended to terminate your LLC prior to converting it.
Once the corporation is formed, the owners have a few more things to do:
- Prepare corporate bylaws,
- Elect officers and directors,
- Hold your initial meeting of the Board of Directors,
- Issue stock certificates,
- Change documentation to reflect the new name,
- Decide whether to file an S corporation election with the IRS, and
- Plan to file your first annual report with the state.
Property, debts, and liabilities of the LLC transfer to the new corporation.
Talk to an Attorney First.
Forming or converting a business may sound simple, but every case is a little different. Make sure your company meets all legal requirements to avoid trouble down the road.
The attorneys at Adams & Miller understand the business needs of their clients. Contact Adams & Miller, P.C. at 256-251-2137 to schedule an appointment. Though our offices are in Anniston and Birmingham, we help clients in Talladega, Gadsden and surrounding communities.
