There’s nothing like spending a whole bunch of money to get incorporated only to learn after the ink has dried (and the check cleared) that you’re in the wrong structure. This usually happens when you talk to your CPA or tax advisor and find out that you’ve got the wrong tax classification for your income. Or, you realize that you’re in a high-risk business, and want the extra protection that an LLC offers over a corporation.
What can you do? Well, depending on where you live, It may not be too late to change things.
Most states offer something called a conversion procedure. That’s where you file paperwork to legally change from one type of corporation to another. For example, you set up a California corporation, but you really want to be a California LLC. Or you’ve outgrown your Texas Limited Partnership and want to move into the new and super-flexible Texas Series LLC, which offers better asset protection for the same price.
If a state doesn’t offer up a straightforward conversion procedure (i.e., file 1 set of documents and you’re done) it will usually allow you to do a 2-step process. In this version, you create the entity you wanted, and then merge your existing entity in. You’ll go forward as the new structure, and the one you started will be dissolved. This procedure is the more costly of the two. In fact, you may want to check if it wouldn’t be more economic to just create a new entity and start over, dissolving your original choice.
But it’s important to realize that when you file the conversion documents you’re converting just the legal structure. You’ve still got the tax side to sort out. Your first step here should be to talk with your CPA or financial advisor about whether the conversion will create a taxable event for you. There may be another way to get where you want to go. Once you’re squared away on that front, ask your corporate service provider if they will take care of any IRS or state tax notifications.
Don’t wait too long! The earlier you make a switch the better, both from a record-keeping perspective and a tax perspective.
If you want to learn more, drop me a line at firstname.lastname@example.org. Let me know what you’ve got (and where you created it) and we can work through your options.