Converting corporations under the new LLC law

Changes mean the real estate transfer tax likely won’t apply to conversions


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Since 1997, New Hampshire’s Limited Liability Company Act has permitted the owners of New Hampshire corporations to convert to LLCs. The process, which is highly user-friendly, is called a “statutory conversion.” In recent years, more than 700 New Hampshire corporations have made these conversions.

If you’re wondering why, there are two powerful reasons:

 • First, no matter how a corporation is structured, New Hampshire residents who receive dividends from them must pay the 5 percent interest and dividends tax on these dividends. New Hampshire LLC members don’t have to pay the tax on distributions from LLCs that have “nontransferable shares.” An LLC has nontransferable shares if its operating agreement provides that members can’t transfer their shares except with the consent of at least one other member or “beneficiary” or that, upon such a transfer, the LLC will be dissolved.

 • Second, the act provides significant protections — called “pick-your-partner” and “charging order” protections — against court orders transferring LLC members’ membership rights to third parties, such as creditors, divorced spouses or bankruptcy trustees.

These protections are far, far stronger under the Revised New Hampshire Limited Liability Company Act, which takes effect on Jan. 1, 2013.

But there is a fly in the ointment. If a New Hampshire corporation wants to convert to an LLC in order to obtain the above benefits but owns valuable New Hampshire real property, the New Hampshire Department of Revenue Administration will assess the real estate transfer tax on the corporation. The transfer tax rate is 1.5 percent of the real property’s fair market value. The risk posed by this tax can sometimes be so large as to persuade the corporation not to convert.

The interesting part

It’s very clear that the DRA has no basis for assessing the transfer tax in corporate conversions, even under the act that expires at the end of the year. This is because, by their very nature, statutory conversions involve only a single entity.

Before the conversion, the entity is a corporation. After it, it’s an LLC. But it’s the same entity after as before, and an entity can’t transfer to itself real property that it already owns. Ergo no transfer tax.

The DRA has been known to argue that a statutory conversion is essentially just a merger — and under New Hampshire law, it’s clear that the transfer tax does apply to mergers. However, mergers by definition involve two entities. Statutory conversions involve only one. Mergers have been authorized in New Hampshire for many decades.

Why, in 1997, would the Legislature have authorized statutory conversions if it thought they are really just mergers?

Here comes the interesting part: The committee that drafted the revisions for the new act (of which I was the chair) included in them express terms stating that statutory conversions involve only a single entity and that they don’t involve transfers.

In an effort to protect their real estate transfer tax argument, the DRA persuaded the House Ways and Means Committee to strike the “transfer” terms, but it didn’t ask it to strike the “single-entity” terms. Under these “single-entity” terms, corporations that make a statutory conversion have a powerful new argument that the real estate transfer tax doesn’t apply to the conversion.

Personally, I’m convinced that in the New Hampshire Superior Court, this new argument will enable these corporations to win their case resoundingly.

In fact, it’s even possible that because it failed to ask the Ways and Means Committee to remove the “single-entity” language, the DRA itself will acknowledge, if pressed in an audit, that with regard to the application of the real estate transfer tax to statutory conversions, it no longer has a leg to stand on.

Attorney John Cunningham, of counsel to the Manchester-based law firm of McLane, Graf, Raulerson & Middleton, is author of “John Cunningham on New Hampshire’s New LLC Act,” available at cunninghamonnhllcs.com.

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