Merging an LLC into an S-Corporation means that the two companies become one company -- the S-Corporation. In other words, the LLC ceases to exist as a result of the merger. Merging two business entities is complex and should not be undertaken without a thorough tax analysis regarding the effect of the merger on the company owners and the merging companies. An attorney’s services may also be required to prepare a plan and a merger agreement between the companies, as well as file the necessary documents with the state to effectuate the merger.
Consult with an attorney and accountant regarding the merger between the LLC and S-Corporation. If the owners of the LLC, called members, are different than the owners of the S-Corporation, called shareholders, each set of owners should retain their own attorney and accountant to avoid a conflict of interest regarding the negotiation of such issues as the valuation of each company’s assets and appointment of directors and officers for the surviving S-Corporation.
Read More: How to Convert an S-Corporation to a Limited Liability Company
Negotiate a plan and agreement of merger between the owners of the LLC and owners of the S-Corporation. The plan should specify the essential components of a merger, such as valuation of the companies, transfer of company assets, permissible business operations prior to the merger and the effective date of the merger. Present the plan to the members of the LLC and shareholders of the S-Corporation for approval; this plan should be memorialized in writing.
Instruct your attorney to review the plan of merger and draft a merger agreement. Most state merger laws require a merger agreement between the two companies. Once the plan and merger agreement have been finalized, the manager of the LLC and president of the S-Corporation should sign the agreement on behalf of the companies. In some situations, counsel may advise that the company owners sign the agreement as well.
Transfer the LLC’s assets into the name of the S-Corporation, and create the necessary documents to indicate the S-Corporation’s assumption of the LLC’s debts and other obligations, as specified in the plan of merger. Also, issue the required shares of stock of the S-Corporation to the members of the LLC to indicate their ownership interest in the S-Corporation. Complete, sign and file the necessary state documents to effectuate the merger, such as a Certificate of Merger in California, and, if necessary, a dissolution of the LLC.
Although both an S-Corporation and LLC can elect to be taxed as a partnership for federal income tax purposes, different tax rules apply regarding certain federal deductions that can be taken by a corporation as opposed to a partnership -- which means that these differences apply to an S-Corporation and an LLC. State tax rules can differ as well. Because of these differences, an accountant's analysis of the tax consequences of the merger between an LLC and S-Corporation is an important first step before deciding to effectuate the merger (see Resources).
A common misconception is that an S-Corporation is a different type of corporation from a C-Corporation. This is not true. Whatever state laws apply to the formation, management and merger involving a C-Corporation apply to an S-Corporation. The term "S-Corporation" denotes an election by the corporation's owners to be taxed as a partnership rather than a corporation for federal income tax purposes.