All About Business June 2020 Tax News

Changing or Converting a Business Entity

Entity Conversions

Under California law, a business entity may be able to convert its legal form into another business entity type, such as when a limited partnership converts into a limited liability company, by filing the necessary paperwork with the Secretary of State (SOS).

Please note that the converted entity may be taxed differently and may have different organizational rules and requirements than the converting entity.

The converting entity ends its tax year on the date of conversion, while the converted entity does not begin its tax year until the following day.

15-Day Rule

Inactive business entities (limited partnerships, limited liability partnerships, limited liability companies and corporations) with a short (15 days or less) tax year are not required to file a return for the short tax year, if they meet both of the following:

• They did no business in California during the tax year
• Their tax year is 15 days or less

The 15-day rule does not normally apply to entities that convert because they are usually doing business during both periods involved. As a result, both the converting and converted entity will each have a filing requirement.

Nonprofit

Under California law, California nonprofit corporations cannot “convert” (change the entity type from a nonprofit corporation into a limited liability company, limited partnership, or general partnership). However, nonprofit corporations can amend or restate their Articles of Incorporation to become a for-profit stock corporation (see the information above for how to do this). Once the nonprofit corporation becomes a stock corporation, the corporation can follow the procedures outlined in Corporations Code Sections 1150 through 1160 to convert into a limited liability company, limited partnership, or general partnership.

To convert from a stock corporation into a limited liability company, limited partnership, or general partnership, you can use the applicable conversion form provided by the SOS. For more information, forms, and instructions relating to conversions with the SOS, visit Conversion Information and the Conversion Information Chart.