Converting a C Corporation or S Corporation into an LLC in Florida
How to Convert a Florida Corporation into a Florida Limited Liability Company
Our firm regularly helps clients who want to convert their corporations into limited liability companies. There are many reasons for a business to do this – for example, they might want to enjoy the increased flexibility and freedom of management afforded by LLCs. While the process is straightforward, converting your business can come with complications that will go unnoticed by non-legal professionals until it’s too late. This is largely because of the different tax statuses involved. Be sure to check with a local attorney before signing off on any paperwork.
What is a Statutory Conversion?
The state of Florida has a process known as a statutory conversion that allows eligible Florida-based C corporations and s corporations to convert their businesses into LLCs by filing with the Department of State. Statutory conversions allow a business to easily change from one entity to another without starting a new business altogether or otherwise breaking continuity. See Fla. Stat. § 607.1112.
The only major change triggered by a statutory conversion is that your Florida corporation will now be a Florida LLC and will be treated as if it had been a Florida LLC since its inception. While this obviously applies to things like your company’s FEIN and property, it also means that any liabilities, lawsuits, liens, and other obligations and legal claims against the corporation will be transferred to the LLC as well. See Fla. Stat. § 607.1114.
Plan of Conversion and Articles of Organization
The first step to converting your Florida corporation into a Florida LLC is to draft a plan of conversion. This plan describes “the terms and conditions of the conversion” and addresses important issues like how stock will be converted into LLC membership interest. It should also include the names of the corporation and the LLC, as well as an acknowledgment that the LLC is formed under the state laws of Florida.
Your plan of conversion will also need to include articles of organization for the new Florida LLC. You can find the state’s sample template here. Just like your corporation’s articles of incorporation, your LLC’s articles of organization should cover essential company information. This includes ts name, its principal and mailing addresses, the name and address of your LLC’s registered agent, and the names and addresses of the managers or managing members. Make sure to have your registered agent and an authorized Member of the LLC sign the article of organization, too.
Once the plan is drafted along with the attached articles of organization for the new LLC, the board of directors will recommend it to the shareholders, who will then need to approve of the plan of conversion before going forward. By default, this approval is obtained by a simple majority vote. However, you should check your articles of incorporation to make sure that this is the case for your corporation, too. See Fla. Stat. § 607.1103(5).
Certificate of Conversion
Next comes the certificate of conversion. Just like with the articles of organization, Florida’s Department of State offers a basic template for your certificate of conversion here. At a minimum, it needs to include:
- The corporation’s name
- A statement that the corporation will be converting to a Florida limited liability company
- The LLC’s name
- Acknowledgment that the LLC is organized under Florida law
- The LLC’s principal address, as well as its mailing address if different
- The conversion’s effective date
- Confirmation that the plan was approved in accordance with Florida law
- A statement regarding payments to shareholders with appraisal rights
- An officer or board member’s signature.
Once everything has been signed and approved of, print your certificate of conversion and mail it to the Department’s mailing address, which can be found on the cover sheet of the linked articles of organization or certificate of conversion. Include a check for $160.00 ($35.00 to file the certificate and $125.00 to file the articles) made payable to the Florida Department of State. Additional filing fees are required for certified copies of your documents or a certificate of status. These optional documents cost an extra $8.75 each.
Limited Liability Company Formalities
Just like with corporations, LLCs have their own formalities to follow in order to stay in compliance with Florida law. This means notifying customers, clients, and vendors of your business’s new entity status, holding member or manager meetings, and keeping minutes for those meetings. It’s also important that you keep your business and personal finances separate in order to maintain liability protections. You will of course still need to file an annual report each year as well. While an operating agreement isn’t legally necessary, it’s still an essential component of a successful LLC. You can read more about Florida operating agreements here.
The tax consequences of your conversion depend on two main factors. One, whether you are converting from a C corporation or an S corporation, and two, its taxation status. Namely, whether the LLC is taxed like a partnership (or as a sole proprietorship if there is only one member) or like a corporation. Things become more complicated at this point. You should check with a trusted tax advisor before moving forward. Generally, you should be aware that:
- C corporations that convert into limited liability companies that are taxed as partnerships or sole proprietorships typically get hit with larger taxes because of ‘double taxation.” Because the IRS typically considers such conversions to be liquidations, the company will be taxed both for what it owes on top of the personal taxes that shareholders pay for their distributions.
- C corporations converting into LLCs classified as S corporations typically suffer the least severe tax consequences. However, doing so requires a special IRS filing. You should still check with a tax advisor to make sure that you cover all your bases.
- Because S corporations only have one taxation method, converting one into an LLC is its own thing altogether. With S corporations, shareholders take on the responsibility of paying taxes through pass-through taxation. This limits the tax consequences for the business itself.
Should I Hire a Lawyer to Convert my Florida Corporation to an LLC?
Without a doubt! While our firm admires do-it-yourself types everywhere, trying to handle your own legal affairs can spell trouble. If things go wrong, you might have to stop doing business while you get things in order. There’s also a chance that the conversion could nullify important business contracts or other previous agreements. Don’t risk your business — contact us today.
Looking to start a business or grow your current business? Contact FL Patel Law today by visiting our website or calling 727-279-5037.