Protecting shareholders from N.H.’s I&D tax

If your corporation converts from a business corporation to an LLC and is properly structured, they won’t have to pay it

If you are a shareholder of a business corporation formed under the New Hampshire Business Corporation Act or any other state corporation law, and your corporation is paying significant dividends to shareholders who are New Hampshire residents, you should seriously consider converting your corporation to an LLC in order to protect them from the New Hampshire interest and dividends tax.

As long as your company is a state-law business corporation, your New Hampshire shareholders can’t avoid that tax. But if your corporation converts to an LLC and is properly structured, they won’t owe it.

For some New Hampshire shareholders, such a conversion can mean annual savings of hundreds, thousands and, in a few cases, hundreds of thousands of dollars. And the “statutory conversion” laws of New Hampshire, Massachusetts and many other states make the process of converting corporations to LLCs relatively simple.

Furthermore, a July 26 ruling by the New Hampshire Department of Revenue Administration resolves in favor of New Hampshire taxpayers two major issues in the above conversions that made some New Hampshire corporations hesitant to engage in these conversions.

The bottom line

First, until the DRA issued the ruling, it was unclear whether such a conversion would trigger the New Hampshire real estate transfer tax for converting corporations that owned New Hampshire real estate. The rule makes clear that it will not.

Second, until the DRA issued the ruling, it was at least somewhat unclear whether, if the LLC was an S corporation, its New Hampshire shareholders would be subject to the I&D tax even though the LLC was structured to avoid it. Again, the answer under the ruling is clearly no.

In my view, the ruling makes clear that this is the case not only for LLCs that are S corporations for federal income tax purposes, but also for those that are C corporations.

If you’ve gotten this far in this article and are wondering how a company can be both an LLC and a C or S corporation, the answer is simple: “LLC” is a purely legal term. “S corporation” and “C corporation” are purely federal income tax terms.

This is why a company that starts out as a state-law business corporation from a law viewpoint and a C or S corporation from a federal income tax viewpoint can convert its legal form to that of an LLC yet retain its tax form as a C or S corporation.

The bottom line: If your state-law business corporation is paying significant dividends to your New Hampshire shareholders, call your accountant and ask if you should convert your corporation to an LLC.

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 All previous articles in his series on the new LLC act are archive at

Categories: Business Advice, LLC