You can change a corporation to an LLC in every state, but the path and the price depend on two things: the method your state allows and whether the corporation is taxed as a C corp or an S corp. Pick the wrong order and a C corp conversion can produce a surprise tax bill large enough to swamp any benefit of the new structure. Run the tax analysis before you touch the paperwork.
Do the Tax Math Before Anything Else
The IRS treats a C corporation conversion as if the corporation sold every asset at fair market value and then liquidated, regardless of which legal method you use to accomplish the change. That treatment is the single biggest variable in whether a conversion makes sense. For an S corporation whose ownership isn’t shifting, the same transaction is generally a non-event.
If you’re a C corp with appreciated assets, get a rough fair-market-value estimate and model the resulting corporate and shareholder tax before you spend money on filings. If you’re an S corp that used to be a C corp, check the calendar against the five-year built-in gains window described below. Only then should you move on to method and paperwork.
Three Ways to Convert
There are three recognized methods, and availability depends on state law.
Statutory conversion is the cleanest. You file a certificate of conversion along with the LLC’s articles of organization with the Secretary of State, and the corporation’s legal existence continues as an LLC. Assets, liabilities, contracts, and pending lawsuits carry over automatically. Where it’s offered, it’s almost always the right choice.
Statutory merger is the fallback when a state doesn’t allow direct conversion. You form a new LLC, then merge the corporation into it with the LLC as the surviving entity. Same end result, more steps, more cost.
Non-statutory conversion, also called an asset transfer, is the last resort. You form a new LLC, the corporation transfers all its assets and liabilities to the LLC, and you dissolve the corporation. Every asset moves individually: separate deeds for real estate, assignments for intellectual property, endorsements for vehicles. Avoid it unless the first two methods are unavailable.
Keep in mind that the legal method does not change the federal tax result for a C corporation. The IRS looks through the form to the substance and treats all three as a liquidation followed by a contribution of assets to the new entity.
What a C Corporation Will Actually Owe
The tax bill arrives in two layers.
At the corporate level, a corporation that distributes property in a complete liquidation recognizes gain or loss as if it had sold that property at fair market value.1Office of the Law Revision Counsel. 26 U.S. Code 336 – Gain or Loss Recognized on Property Distributed in Complete Liquidation If the business owns appreciated real estate, equipment, or goodwill, that embedded gain becomes taxable the day of the conversion. Net operating losses or capital loss carryforwards can offset some of it, but many small corporations don’t have those balances to spend.
At the shareholder level, amounts received in a complete liquidation are treated as payment in exchange for the stock, producing capital gain or loss.2Office of the Law Revision Counsel. 26 U.S. Code 331 – Gain or Loss to Shareholder in Corporate Liquidations Each shareholder compares the fair market value of what they received against their basis in the stock. Long-held, profitable companies with low stock basis produce the largest gains here. If a shareholder’s basis is close to the current value of the distributed assets, the second-layer gain can be small or zero.
There’s also a filing requirement that’s easy to miss. The corporation must file Form 966 within 30 days after the board adopts the plan of conversion.3eCFR. 26 CFR 1.6043-1 – Return Regarding Corporate Dissolution or Liquidation The deadline doesn’t affect the tax owed, but skipping it invites IRS attention.
Why S Corporation Conversions Are Usually Painless
An S corporation and a default multi-member LLC are both pass-through entities, so when ownership percentages stay the same the IRS generally treats the conversion as a non-event. Assets keep their existing basis. No gain is recognized. No deemed liquidation. This is why some advisors recommend electing S status first and then converting to an LLC, if the timeline allows.
One trap: the built-in gains tax under Section 1374. If the S corporation used to be a C corporation, appreciated assets held at the time of the S election can be hit with corporate-level tax if they’re sold or deemed sold within the five-year recognition period beginning the first day of S status. The net recognized built-in gain is taxed at the highest corporate rate.4Office of the Law Revision Counsel. 26 U.S. Code 1374 – Tax Imposed on Certain Built-In Gains Once the five-year window closes, the risk disappears. Timing the LLC conversion for after that date can save real money.
Get Shareholder Approval and Deal With Dissenters
The board of directors has to adopt a plan of conversion, and the shareholders have to vote to approve it. Most states require a majority of outstanding shares, but some states and many corporate charters impose a supermajority. Read the articles of incorporation and bylaws for heightened voting thresholds before you set a meeting date.
Shareholders who vote against the conversion may have appraisal rights, sometimes called dissenters’ rights. A dissenting shareholder can demand that the company buy back their shares at fair market value instead of being forced into the new LLC. Procedures and deadlines vary by state, but the pattern is a written demand filed before or shortly after the vote. Exercising appraisal rights usually waives the right to challenge the conversion itself in court. If the parties can’t agree on price, either side can petition a court for a fair-value determination.
In closely held corporations this is where things get expensive. A minority holder who refuses to roll into the LLC can trigger a buyout the company didn’t budget for. Have the informal conversation before the formal vote.
Documents and State Filings
Two kinds of paperwork: internal governance documents and state filings.
The plan of conversion is the foundational internal document. It names the existing corporation and the new LLC, specifies how shares convert into membership interests, and sets any other terms. The board adopts it, the shareholders approve it, every other document follows it.
The LLC operating agreement replaces the corporation’s bylaws and shareholder agreements. It sets management structure, allocations, voting, and exit rules. Most states don’t require filing it, but without one the LLC runs on the state’s default rules, which rarely match what the owners actually want.
On the state side, you file a certificate of conversion (also called articles of conversion or a statement of conversion) with the Secretary of State. It typically includes both entity names, the effective date, and confirmation that the plan was properly approved. You also file the LLC’s articles of organization, which creates the LLC and sets its name, registered agent, and management structure. In some states a single filing covers both. Combined filing fees generally run from around $100 to several hundred dollars.
Processing times range from same-day to several weeks, and the conversion takes effect either on the state’s approval date or a future date you specify. A few states require newspaper publication of the conversion; most don’t, but the ones that do impose penalties for skipping it, so check your state’s rule before you consider the job done.
Federal Tax Steps After the State Approves It
Once the state signs off, deal with the IRS side.
On the EIN, the IRS says you don’t need a new one if you “convert at the state level and don’t change your business structure,” but moving from a corporation to an LLC is a structural change in most cases.5Internal Revenue Service. When to Get a New EIN When in doubt, apply. It’s free and takes minutes online.6Internal Revenue Service. Get an Employer Identification Number
If the business was an S corporation and you want the LLC to keep S treatment, file Form 2553. A common misunderstanding is that you also have to file Form 8832 separately. You don’t. Under Treasury regulations, an eligible entity that timely files Form 2553 is automatically deemed to have elected corporate classification.7Internal Revenue Service. Entities 3 File it promptly. Miss the deadline and the LLC defaults to partnership taxation if it has more than one member, or disregarded entity status if it has one, neither of which may be what you want.
For a C corporation conversion that triggered the deemed liquidation, the corporation files a final corporate return reporting the gain on the deemed asset sale, and shareholders report their capital gains on their individual returns for that year.
Clean Up Contracts, Licenses, and Accounts
The state filing is the legal milestone. The practical work runs for weeks after.
The step businesses most often underestimate is contract review. Go through every existing contract for anti-assignment clauses. A statutory conversion where the entity legally continues may not trigger those clauses in some jurisdictions, but a merger or an asset transfer frequently does. Clauses that prohibit assignment “by operation of law” are the most dangerous. Reach out to landlords, lenders, and major vendors before they find out from a renewal notice.
Update bank accounts with a copy of the approved articles of organization and operating agreement. Reissue or reapply for business licenses, professional permits, and industry-specific registrations; some agencies treat a conversion as a continuation, others require a fresh application. Notify your insurance carriers so the named insured matches the LLC, or you risk a coverage gap. Send written notice to major creditors, vendors, and customers so invoices and payments land in the right name.