Wednesday, July 11, 2012

Converting from Corporate to a Limited Liability Company (LLC)

A prospective client contacted Attorney Matthew C. Mullhofer in regards to converting his corporation to a limited liability company (LLC); he wanted to know what the benefits of converting were. 

Matthew C. Mullhofer explained that it wasn’t until recently that California allowed a Corporation to convert to an LLC.  The reason to convert a corporation into a limited liability company (LLC), is to achieve better asset protection from outside credits and have less ongoing documentation i.e. corporate minutes, but not to be considered to have liquidated for income tax purposes.  An important fact to know, Attorney Mullhofer stated, is if a company owner wants to continue obtaining favorable tax benefits as either a C Corporation or S Corporation a company owner will not be subject to the gross receipt tax discussed below under the disadvantages of utilizing an LLC.

Matthew C. Mullhofer explained that a major reason an LLC is more appealing as a business entity is because you are not required under the Beverly-Killea Limited Liability Company Act to have formal membership meetings compared to corporations.  

Another reason why an LLC is more appealing under the Act in comparison to the corporate laws under the State of California and other states is the charging order protection.  Under a charging order, an outside creditor becomes only an assignee and will not be able to vote your membership interest and dissolve the LLC compared to a corporation and being able to vote your stock.

Attorney Mullhofer pointed out that after conversion an LLC could still be taxed as a corporation by making certain of just a few steps.  First, by being certain that before and after the conversion the equity interest remains the same.  A reason why people would choose to want to remain as corporations or be tax as one on formation is because family members may prefer the certainty of corporate tax treatment for their closely held business.  However, an LLC taxed as a corporation may deduct certain employee benefits. 

Call Matthew C. Mullhofer today at (714) 827-9955 to discuss your business questions.