The Internal Revenue Service by default treats limited liability companies with more than one member as partnerships. Converting a general partnership into an LLC treated with the default classification is a fairly simple matter, provided all partners and the company assets are converted to the LLC. Because LLCs are governed by state law, specific regulations will vary depending on where you set up the business.
Check regulations governing the formation of LLCs in your state. The Limited Liability Company Center notes that many states provide a form to convert a partnership into an LLC, transferring assets and partnership interests in one step. California, for instance, provides a one-page conversion form with requirements that include the name of the old partnership and the new LLC, name and address of a resident agent or company officer, and the signatures of at least two partners. If your state has such a one-step form, fill in the appropriate conversion information.
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File the form to convert your partnership into an LLC with the appropriate state office, usually the secretary of state. If your state doesn’t have the one-step conversion form, file articles of organization or a similarly titled document with the state to establish the LLC. The new company can have the same name as the former partnership with the addition of "Limited Liability Company" or the initials "LLC" attached to it, or it can have an entirely new name, as long as it has the LLC identifier as part of it.
Pay any fees for the filing. Fees for forming an LLC vary widely by state, from $50 to several hundred dollars.
Dissolve the old partnership. The LLC is the successor company, as would happen in the surviving entity of a merger. General partnerships need not be registered on the state level, and if your partnership was based on an informal agreement, BusinessWeek advises there is no legal business entity to dissolve. Even so, you may need to transfer any local business licenses to the LLC. If your partnership operated under a company name, you may also need to file a termination of an assumed name. You should transfer any leases to the new LLC. If your partnership was registered to do business in other states, you will need to notify those states as well.
Transfer all assets from the partnership to the LLC. Technically, dissolving the partnership distributed all the assets and liabilities to the partners, who then contributed them to the new LLC. But the Limited Liability Company Center states the IRS considers the conversion as not terminating the previous partnership since it continues in an LLC recognized as a partnership for tax purposes. So there is no gain or loss in the conversion, and a partner’s interest in the partnership continues in the LLC.
The conversion will not eliminate any personal liability that existed before the partnership became an LLC. The law firm Greenbaum Rowe Smith & Davis suggests you should also obtain the consent of any lenders with outstanding loans to the old partnership to avoid triggering a default. Any personal assets used as collateral for a business loan are still at risk after the partnership’s conversion to an LLC.