Q: I opened a c-corporation and then realized I should have just started an LLC. What would be more cost-effective, switching from a c-corp to an LLC or just opening a new LLC?
Thanks to a client in Tennessee for this great question! There are three different ways to convert your Tennessee corporation into an LLC: statutory conversion, non-statutory conversion, and statutory merger. Each approach requires filing different paperwork with the state, different asset transfer procedures, and different fees.
Ultimately, what is most cost-effective in terms of money, time, and effort will depend on your business. Filing fees for non-statutory conversion are less than the filing fees for statutory conversion, but you’ll also need to liquidate and transfer all of your assets, which isn’t necessary with statutory conversion.
We’ll provide a general comparison of the three methods and their costs, plus how to inform the IRS of the change.
Statutory Conversion
Statutory conversion allows you to convert your existing business entity into another type of business entity—in this case, from a corporation to an LLC.
Before filing conversion paperwork, you’ll need to consult your corporate bylaws and follow all provisions related to converting your corporation, including obtaining a vote of approval from your board of directors. You must also create and adopt a plan of conversion that outlines the financial and organizational details of your conversion, such as how your assets will be re-distributed within your LLC (if necessary) and how your LLC will be managed.
Required Filings
For statutory conversion of a corporation to an LLC in Tennessee, you’ll need to file:
- Articles of Entity Conversion
- LLC Articles of Organization (attached to Articles of Entity Conversion)
Associated Costs
- Articles of Entity Conversion: $100
- LLC Articles of Organization: $50 per member, with a minimum fee of $300 and a max of $3,000
You may have additional conversion-related costs, such as organizational expenses, changing marketing materials, and updating business licenses.
Non-Statutory Conversion
With non-statutory conversion, you create a new LLC, transfer all of your corporation’s assets to that new LLC, and then dissolve your corporation. This is more complicated than statutory conversion because you have to liquidate your corporation’s assets and sell them to your LLC. You’ll need to start over from scratch, which means you’ll need new bank accounts and may need to re-hire employees. You may also need to use a different business name since yours will not automatically transfer.
As with statutory conversion, you’ll need to review your corporate bylaws and hold a meeting of your board to approve the dissolution of your corporation and conversion to LLC. Likewise, you’ll also have to draft a plan of dissolution that describes how your assets will be liquidated.
Required Filings
For statutory conversion of a corporation to an LLC in Tennessee, you’ll need to file:
- LLC Articles of Organization
- Articles of Dissolution (For-Profit Corporation)
Associated Costs
- LLC Articles of Organization: $50 per member, with a minimum fee of $300 and a max of $3,000
- Articles of Dissolution: $20
You may have additional conversion-related expenses like updating or getting new business licenses, revamping marketing materials, and canceling and re-applying for loans.
Statutory Merger
To perform a statutory merger, you’ll create a new LLC, and then you’ll merge your corporation with the LLC to create a surviving LLC. While Tenn. Code Ann. § 48-21-102 permits merger, the Secretary of State doesn’t provide a form for corporate merger filings. You’ll have to draft your own Articles of Merger using the guidelines set forth in Tenn. Code Ann. § 48-21-107.
As with statutory and non-statutory conversion, you’ll start by going over your corporate bylaws and convening your board of directors to vote on the merger. After approval, you’ll need to craft a plan of merger that dictates how your assets will be re-distributed within surviving LLC and how your LLC will be managed.
Required Filings
For statutory conversion of a corporation to an LLC in Tennessee, you’ll need to file:
- LLC Articles of Organization
- Articles of Merger
Associated Costs
- LLC Articles of Organization: $50 per member, with a minimum fee of $300 and a max of $3,000
- Articles of Entity Merger: $100 (Tenn. Code Ann. § 48-11-303)
Of course, you may encounter additional costs to update business licenses and materials along with business restructuring.
Additional Considerations
When converting your Tennessee corporation into an LLC, there are a few more items to consider:
Operating Agreement
Because your corporate bylaws will no longer hold sway, you’ll need to write an operating agreement for your LLC. Your operating agreement details the internal operations of your LLC, including how your LLC is managed, how profits are handled, and how to resolve issues between members.
New EIN
The IRS requires corporations that have converted to LLCs and will be taxed as sole proprietors or partnerships to obtain a new EIN.
You’ll need to write a letter to the IRS that cancels your previous EIN and then apply for a different EIN.