august2022 - 24

FEATURE
CHANGING LEGAL STRUCTURES:
By Nellie Akalp
BUSINESS CHANGE IS constant, so it wouldn't be surprising if, at some point,
your clients considered changing their legal structures. In this first Conversion
Series post, we'll explain how to help your clients change from a limited liability
company (LLC) to a C Corp and vice versa. There are several reasons your clients
may want to switch from an LLC to a C Corp or the other way around. While both
legal entities protect business owners from personal liability from the company's
debts and lawsuits, they differ in ownership structures and tax consequences.
LLC MANAGEMENT STRUCTURE
Business owners of an LLC are referred to as
members. A single-member LLC has one owner,
and a multi-member LLC has two or more owners.
Regarding management structure, the LLC
can be member-managed or manager-managed
(hiring a non-member to run the company). By
default, if the LLC does not specify the management
structure, the state assumes the LLC is
member-managed.
The LLC records the management structure
and more in a document called articles of oOrganization
(sometimes referred to as " certificate of
organization " ) that gets filed with the secretary
of state. Although the details required in articles
of organization vary by state, in general, the following
information is included:
* LLC name
* Statement of purpose
* The physical address of the LLC's principal
place of business
* Mailing address
* LLC's management structure (i.e., membermanaged
or manager-managed)
* Registered agent's name and address
* LLC's organizers' names (and managers,
if applicable)
* Effective date requested
A registered agent is the member of the LLC
that's the official contact responsible for the
LLC's legal correspondence. LLCs doing business
in a state other than their home state must
name a registered agent (a person or company)
that agrees to accept legal papers on the company's
behalf.
In addition, most LLCs create a formal operating
agreement that documents the logistical
details of the company, such as who is responsible
for what, how to file taxes, what happens
to the business if a member wants out, etc.
Although not required by the state, it is highly
advisable to have a set plan for contingencies,
24 AUGUST 2022 ■ www.CPAPracticeAdvisor.com
even in a single-member LLC. Operating agreements
also provide further proof the business
runs as a separate entity, which is essential for
the liability factor.
Finally, an LLC may be required to file an
annual report with the state to notify the government
of any changes of address or personnel
within the company.
C CORP MANAGEMENT STRUCTURE
Business owners of a C Corp are considered shareholders
and employees of the corporation. Shareholders/owners
work for the corporation and receive
a salary and W2s. In a C Corp, the owners must form
a board of directors to oversee the corporation. A
director and officers must be elected from within
the board and are responsible for approving critical
business decisions. This structure is required even
if there is one shareholder and one board member.
The board of directors is also responsible for the
ongoing corporate formalities to maintain compliance
and remain in good standing with the state.
C Corps must have regular meetings, including at
least one annual shareholder meeting where formal
minutes are recorded.
Like the LLC, a C Corp must create and submit
articles of incorporation (sometimes called a " certificate
of incorporation " ). Once the state approves the
company's articles of incorporation, the business is
officially considered a separate legal and tax-paying
entity from its owners. Again, the information
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august2022

Table of Contents for the Digital Edition of august2022
