Hello nyranger,
Thank you for your question. I am happy to assist you.
The process of converting from an S-Corporation to an LLC is relatively simple from a legal standpoint. However, you should be aware of the consequences of doing so as it can impact the shareholders significantly.
You should start out with your S-Corporation’s directors voting to approve the conversion to an LLC and creating a conversion plan. Then, a majority of the stockholders would need to approve the plan. If the approval was successful, the next step would involve your state. In some states, the process involves completing a conversion form which needs to be filed with the Secretary of State of other governmental entity that is in charge of overseeing corporations and other business entities. Other states may involve creating a new LLC, merging the S-Corporation with the LLC, and then naming the new LLC as the survivor of the merger.
While there could be various benefits to of this type of conversion, there are some consequences as well. You will likely have to liquidate your S-Corporation to achieve this conversion. This process will be recognized as a gain under Section 336 as if the S-Corporation sold all of its assets. If the S-Corporation’s assets have increased in value between the time it was formed and the time it was liquidated and converted to an LLC, a capital gain is realized which means that the shareholders must pay capital gains tax on the amount of the gain.
Please refer to the articles by clicking on the links below for more information:
https://www.upcounsel.com/tax-consequences-of-converting-s-corp-to-llc#:~:text=There%20are%20two%20w....
https://www.bergerlaw.net/making-the-switch-from-an-s-corporation-to-an-llc.html
Please let me know if this answers your questions, or if I can be of further assistance.
Thank you!
Shirleyh88
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