It usually is good to start your game as an LLC (Limited Liability Company). In fact, due to the tax flexibility it offers and how easy the startup process is, many businesses start as LLCs.
But, later down the line, many things can go wrong. And that is where you will feel the need to change the business type.
You see, many states, such as California, require certain professionals to operate as a professional corp. But, the good news is that you can easily change your business to a professional corp.
Want to know how to convert from LLC to Professional Corp? You will need to read through to find out!
How to Change from LLC to Professional Corporation?
Many companies are not familiar with the business type conversion process. And it might seem like the process is pretty complicated. But it’s not that hard. Just you need to know the two significant steps of the conversion. And they are:
- Prepare a plan for the conversion
- File articles of the conversion with the secretary of the state
That’s all. Now, although these two steps might sound simple, you might face a lot of issues in between them. And the level of difficulties for the conversion process will depend on your expertise in the area.
It can be a piece of cake for you, or it can be something that you will need to put too much effort into.
That is why many local authorities will advise you to seek assistance with the documentation method. But if you know what to do, you can effectively get the job done on day one.
Pre-requisite of Changing Your LLC to A Prof Corp
So, there is a pre-requisite for changing a business entity in certain states, such as California. And that is: you need to adopt a new name for the corporation.
However, you should know that this process requires you to follow a set of rules that is specific to the type of professional service you plan to offer.
The rules will also depend on the corporation you intend to establish. So, get to know them before you change the name of your entity.
Documentations That You Will Need for The Conversion Process
Let’s face it; the conversion process is not something that you can get by with little documentation. You will need to put a lot of time into preparing the documents.
And it also requires legal counsel to make them correctly. But if you are an expert in the field, you should start drafting all the docs prior to the filling process.
Now, you might be wondering what documents you need, right? Well, here is the list of the docs that are generally required for the conversion process:
- Waiver of Notice
- Incumbency Certificate
- Special meeting minutes of the board of directors for approving the conversion
- Corporate Summary
- New Stock Certificates (California)
- New Ledger (California)
- Secretarial Certificate
- Amended and Restate Bylaws (California)
- A new seal
California, for example, requires a statement of approval by the members of the Limited Liability Company. For that reason, holding a shareholder meeting is a must.
Also, IRS will not transfer an EIN (Employer Identification Number) assigned to an LLC to a Professional Corporation. For that, you will need a new EIN.
Additional Requirements for Changing A LLC to An Prof Corp
Aside from the key elements of the conversion, you would have to get new corporate officers and directors elected and appointed. It is a part of the required formalities for the conversion. You should also note that the bank document leases and other contracts of the business should be intact during the transition.
Furthermore, you would need to go through these additional steps:
- Creating corporate bylaws
- Holding an initial board meeting
- Applying for a new Employer Identification Number (EIN)
- Issuing stock certificates
Once the conversion is complete, you must follow new corporate formalities. That includes holding regular meetings of the shareholders and directors, filing annual reports with the state, and maintaining corporate minutes.
Tax Consequences of Changing A Business from LLC to Prof Corp
Both LLCs and Professional Corporations have advantages and disadvantages when it comes to personal liability protection and taxation.
Professional corps are handled with a C corp, which is taxed on the net profit of the company. The owners will be subject to double taxation if the after-tax net profits are distributed.
On the other hand, for most states, LLCs do not need to pay state taxes. However, a few need to. Also, some states will impose renewal, franchise, or annual registration fees.
Now, to avoid double taxation, Professional Corporations and Limited Liability Companies can file as an S corporation. That would be via an IRS tax election.
Now that you know what to do if you started an LLC but realized you need a professional corporation, you just have to follow the right steps instead of panicking.
But, if you think that all the processes are a little tough for you to handle, you can always consult an expert in the field. That will make the process a breeze.
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