Incorporation limits the liability of the company's owners and shareholders. The Limited Liability Company (LLC) and the S-Corporation are two common incorporated business structures. LLCs are easier to manage since they do not require the formal record-keeping practices that the law expects of an S-Corporation. Additionally, LLCs allow for unlimited shareholders, while S-Corporations can have no more than 75 owners. If you currently have an S-Corporation, it is possible to convert it into an LLC in two ways: through a merger or by notifying the state of a change in the corporation's status.
Merger
Create a new LLC in the state of incorporation. Each state provides its own laws and procedures for creating an LLC. In most cases, you file with the Secretary of State of the company's home state and the incorporation is then complete. Many states offer this service online.
Merge your existing S-Corporation with the new LLC. The merger may require legal assistance or the involvement of a business broker. For larger companies, a mergers and acquisitions specialist may be necessary.
Write into your company's operating agreement that the LLC is the surviving member of the merger.
Dissolve the S-Corporation after the merger is complete, if desired. The assets of the combined merged companies now belong solely to the LLC. This merger process is available in all states. It is the only option if the state does not otherwise allow you to simply convert the S-Corporation's status into the LLC structure (see next section).
Status Conversion
Call the office of the Secretary the State of the state of residence of the S-Corporation. Verify that you can convert a company's status from one business model to another through the filing of an official form. This is available in many states but not all. It is more efficient than a merger.
Complete the state's official documentation to change a company's status from S-Corporation to LLC.
Submit the document to the Secretary of State along with any required administrative fees for processing. Your S-Corporation is now an LLC.
Warnings
If your S-Corporation has grown in value during its time of incorporation, a conversion to an LLC may cause any shareholders of the company to receive capital gains that are subject to taxation by the IRS. This is worth considering before you make any changes to your company's status.
Tips
While most states use the Secretary of State for all incorporation procedures, some states may have a different designated office that you must contact instead.
References
Writer Bio
James Highland started writing professionally in 1998. He has written for the New York Institute of Finance and Chron.com. He has an extensive background in financial investing and has taught computer programming courses for two New York companies. He has a Bachelor of Arts in film production from Indiana University.