Converting an LLC to a C-Corp in Maryland
When considering converting your Maryland Limited Liability Corporation (“LLC”) to a C-Corporation (“C-Corp”) there are requirements at the federal and state level to follow. At the state level, you are changing the legal form of your entity and following the applicable statute for conversion. On the federal level, is the taxation classification, and one must pay close attention to federal taxation laws and the Internal Revenue Service (“IRS”) guidance.
In Maryland, when converting your LLC to a C-Corp, the process is relatively simple under Maryland’s Limited Liability Company Act (the “Act”). There are two main requirements under the Act: approval of a plan of conversion by the LLC’s Members and filing Articles of Conversion with the Maryland State Department of Assessments and Taxation. Maryland does not require a plan of conversion in addition to the Articles of Conversion; it may be sufficient to reflect approval of the plan in the LLC’s Meeting Minutes.
The Articles of Conversion filed with the State must include the name of the LLC and the original filing date of the Articles of Organization, name of the new entity the LLC is converting to, a statement that the conversion has been approved by the LLC members, the manner and basis of converting membership interest in the LLC into shares of stock, and other information necessary to effectuate the conversion.
At the same time, you must prepare and file the Articles of Incorporation for the new entity and conduct ordinary business customs for the new C-Corp entity. That includes drafting bylaws, organization minutes, board meetings, electing corporate officers and appointing directors, and filing an annual report.
The conversion will automatically transfer the LLC’s assets and liabilities into the new entity. Prior to converting your LLC to a C-Corp, a thorough review of any licenses, permits, bank documents, leases, insurance, and business agreements is necessary to ensure converting the entity does not affect any of the exiting documents or agreement in place.
Prior to converting your LLC to a C-Corp, a thorough review of any bank documents, leases, insurance, and business agreements is necessary to ensure converting the entity does not affect any of the exiting documents or agreement in place.
On the Federal level, you must look at the LLC’s tax classification to determine the IRS procedures to follow and what the tax consequences are in converting. An LLC has what is called “pass-through” taxation. The LLC itself does not pay taxes on business income, but the members of the LLC pay taxes on their share of the LLC’s profits. A C-Corp is a separate taxable entity and must pay taxes on its profits. Then, the C-Corps shareholders pay income taxes on the profits on their personal income tax returns if the C-Corp distributed dividends.
Regardless, it is important to consult a business attorney and a tax advisor if you are considering converting your LLC to a C-Corp or other entity.
Written by Summer Pannizzo, Esq. The information contained herein is provided for general informational purposes only and may not reflect the current law in your jurisdiction. No information contained in this blog should be construed as legal advice from Shumaker Williams, P.C. or the individual author, nor is it intended to be a substitute for legal counsel on any subject matter. This blog is current as of the date of original publication.
Rachel Wolf, Esq
January 12, 2024