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Converting a California LLC to a Corporation

Does your client want to convert their limited liability company (LLC) to a corporation? Did you know that converting an LLC into a corporation can be easy as checking a box?

Generally, converting from one California entity to another entity can be a cumbersome task. In some cases, you may need to file conversion documents with the Secretary of State, and in other cases you may need to file termination/dissolution documents for the one entity and formation documents for the new entity.

However, converting an LLC into a corporation can be almost as easy as checking a box. If an LLC classified as a partnership or that is disregarded wants to convert to a corporation, the LLC can use the IRS Form 8832, Entity Classification Election, to change their entity classification. The federal election automatically applies for state tax purposes. The classification must be the same for both state and federal tax purposes.

An LLC falls under the federal default rules of a partnership, if it has two or more members, a disregarded entity, or if it has a single owner. The LLC can elect to be classified as an association taxable as a corporation. An association can be taxed as a corporation by election under the default rules in IRC Section 301.7701-2a.

If an LLC elects to be classified as an association, it is deemed that it contributes all of its assets and liabilities to the association in exchange for stock in the association. Immediately thereafter, the partnership liquidates by distributing the stock of the association to its partners.

A new rule limits an eligible entity’s ability to change its classification by election again during the 60 months after the effective date of making an earlier entity classification election.

The election cannot take effect more than 75 days before the date it’s filed, nor can it take effect later than 12 months after the date it’s filed.

A copy of the Form 8832 should be attached to the California return for the year the election is effective.

Note: There may be tax consequences from changing to a different form (flow-through to corporation). Taxpayers may wish to seek further advice from a tax expert before converting a flow-through entity into a corporation.

Back to July 2009 Tax News