Can We Merge an LLC into a Corporation?

Yes.  Under the laws of Ohio and many states, limited liability companies and corporations may be merged into a single surviving entity.  The surviving entity can be the LLC or corporation as determined by the parties and set forth in the Merger Agreement.  The Merger Agreement must be approved by such number or percentage of the Directors and Shareholders of the corporation, and such number or percentage of the Members and Managers of the .LLC, as set forth in the organizational documents of the corporation and LLC, or as otherwise prescribed by law. 

Under Ohio law, the Merger Agreement would need to be approved by a 2/3rds majority of the Shareholders of the corporation unless the Articles of Incorporation of the corporation provided for a lesser percentage (not less than a majority).  Under Ohio law, if the LLC had no Managers, the Merger Agreement would need to be approved by ALL of the Members (unless the Operating Agreement provided for a lesser number or percentage).  If the LLC had one or more Managers, the Merger Agreement would need to be approved by ALL of the Managers (unless the Operating Agreement provided for a lesser number or percentage). 

The tax treatment of the merger could vary depending on several factors including: (1) whether the LLC elected to be a corporation or partnership for federal income tax purposes, (2) whether the LLC or the corporation was the survivor of the merger, (3) whether the corporation was an “S” corporation or a “C” corporation, and (4) whether the owners of the merged entity became owners of the surviving entity or were cashed out.  If the LLC made an election to be treated as a corporation for federal income tax purposes, the merger of the LLC with and into corporation would generally be treated like a tax-free reorganization under the federal income tax code.  If the LLC was treated as a partnership for federal income tax purposes, then the merger of the LLC into the corporation would generally be treated as a tax-free partnership distribution, followed by a tax-free capital contribution to the corporation. 

If the merger was done in the other direction, and the corporation were merged into the LLC, the merger would be treated as a tax-free reorganization if the LLC had previously made an election to be treated as a corporation for federal income tax purposes.  But if the LLC was treated as a partnership, the merger of the corporation into the LLC would be treated as if the corporation had sold all of its assets to its shareholders in a taxable sale, and the shareholders subsequently contributed the assets to the LLC as a capital contribution. 

When merging, LLCs, corporations and other entities, you need to consider all of the legal, tax and accounting issues that might arise or be affected by the merger.  Please call or email me if I can help you understand the process.  Jsenney@pselaw.com or 937-223-1130.

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AND ONE MORE THING.  How long has it been since you had a Legal Audit?  The Business attorneys at PS&E would like to meet with you and do a FREE legal audit of your business.  As part of the legal audit, we will work through a checklist with you and identify areas where you may be at risk.  If you would like to schedule a free Legal Audit with one of the PS&E attorneys, please send me an email or give me a call.  Jsenney@pselaw.com or 937-223-1130.

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