Converting a California Limited Liability Company (LLC) to a California Professional Dental Corporation is an option for licensed dentists rendering professional services in California who discover that, pursuant to California Corporations Code Section 17701.04(e), they are prohibited from using a California LLC to render dental services in California. These licensed dentists may have learned about this from speaking with colleagues or reading one of the following articles:

Can a Dentist Practice Dentistry Using a California LLC?

10 Steps to Convert LLC to Professional Dental Corporation in California

A licensed dentist should understand the essentials and implications of conversion from a California LLC to a California Professional Dental Corporation, when it is the best choice for bringing business entities into compliance with California law for the provision of professional service by the business owner, professional employees, and other licensed professionals, and what other options exist prior to deciding how to migrate from practicing in a California LLC to a California Professional Dental Corporation.

Conversion from a California LLC to a California Professional Dental Corporation is often a solid choice when business entities must be changed to comply with California laws, but conversion is not always the best solution. Converting California LLCs to California Professional Dental Corporations may seem like the best move for licensed dentists seeking to comply with the pertinent portions of the California Business and Professions Code for their profession with certain benefits such as personal liability protections, the separation of personal and corporate assets, the ability to not pay self-employment taxes on net income and instead pay payroll taxes on business income paid to licensed professionals as salary in S Corporation status, and enhanced credibility or tax advantages, however, this article will examine a few examples of when conversion is not always the best option.

The Cost of Conversion of a California LLC to a California Professional Dental Corporation is Generally Higher than Dissolving a California LLC and Forming a New California Professional Dental Corporation

When considering a transition from a California LLC to a California Professional Dental Corporation, one of the most significant factors to evaluate is the financial aspect of the conversion process. While it may initially appear convenient to convert an existing California LLC into a California Professional Dental Corporation, the reality is that this route can be more costly than simply dissolving the existing LLC and forming a new California Professional Dental Corporation.

Initial Filing Fees for Conversion of a California LLC to a California Professional Dental Corporation versus Dissolving a California LLC and Forming a New California Professional Dental Corporation

The initial filing fees associated with converting a California LLC to a California Professional Dental Corporation are more costly than dissolving a California LLC and establishing a new California Professional Dental Corporation. This section will provide an overview of these costs.

Initial Filing Fees for Conversion of a California LLC to a California Professional Dental Corporation

The conversion process requires specific filings with the California Secretary of State, which incur various fees. These costs can include Articles of Incorporation Conversion to convert a California LLC into a California Professional Dental Corporation. The filing fee for Articles of Incorporation Conversion is $150 at the time of this writing.

Initial Filing Fees for Dissolving a California LLC and Forming a New California Professional Dental Corporation

In contrast, the filing fee for Articles of Incorporation to form a new California Professional Dental Corporation is $100 at the time of this writing. There is no filing fee to file California Secretary of State Form-4/8, the Short Form Cancellation Certificate, Limited Liability Company, California Secretary of State Form LLC-3, the Certificate of Dissolution Limited Liability Company, or California Secretary of State Form LLC-4/7, the Certificate of Cancellation, Limited Liability Company, so dissolution of the California LLC does not add anything to the initial filing fees.

Attorneys’ Fees for Conversion of a California LLC to a California Professional Dental Corporation versus Dissolving a California LLC and Forming a New California Professional Dental Corporation

Complexity surrounding legal and regulatory requirements for a conversion can lead to higher attorneys’ fees, as the time required to draft documents and execute a conversion from a California LLC to a California Professional Dental Corporation is greater than the time required to dissolve a California LLC and form a new California Professional Dental Corporation.

Legal guidance becomes paramount in a conversion process to ensure compliance with relevant laws. Professionals may need to engage services to handle the paperwork and navigate the nuances of California’s business laws. Conversely, forming a new California Professional Dental Corporation after dissolution of a California LLC may involve less legal work, as these procedures are more standardized.

Notice of Exchange Transaction or Entity Conversion Pursuant to California Corporations Code Section 25103(h) Filing Fees for Conversion of a California LLC to a California Professional Dental Corporation versus Limited Offering Exemption Notice Pursuant to California Corporations Code Section 25102(f) for Dissolving a California LLC and Forming a New California Professional Dental Corporation

In evaluating the financial implications of converting a California LLC to a California Professional Dental Corporation, it is crucial to consider the specific filing fees associated with the Notice of Exchange Transaction or Entity Conversion. This section will compare these fees against those required for filing the Limited Offering Exemption Notice when dissolving an LLC and subsequently forming a new Professional Dental Corporation. Understanding these costs will help licensed dentists make an informed decision about their business structure and compliance with California law when migrating from a California LLC to a California Professional Dental Corporation.

Filing Fees for Notice of Exchange Transaction or Entity Conversion Pursuant to California Corporations Code Section 25103(h)

When converting a California LLC to a California Professional Dental Corporation, the associated filing fees for the Notice of Exchange Transaction or Entity Conversion as specified in California Corporations Code Section 25103(h) are worth examining. The filing fee for this notice is $600 at the time of this writing, and the complexity of the documentation required necessitates legal assistance from an experienced corporate attorney.

Filing Fees for Limited Offering Exemption Notice Pursuant to California Corporations Code Section 25102(f)

In contrast to the $600 filing fee for a Notice of Exchange Transaction or Entity Conversion, the filing fee for a Limited Offering Exemption Notice pursuant to California Corporations Code Section 25102(f), one of the most commonly used exemption for original issuance of shares of stock in a newly-formed California Professional Dental Corporation, which vary between $25 for capitalization of up to $25,000, $35 for capitalization of up to $100,000, $50 for capitalizations up to $500,000, $150 for capitalizations up to $1,000,000, and $300 for capitalizations in excess of $1,000,000.

Even the highest Limited Offering Exemption Notice filing fee at $300 is half of the filing fee of the Notice of Exchange Transaction or Entity Conversion filing fee of $600. As most California Professional Dental Corporations are capitalized at or below $25,000, the Limited Offering Exemption Notice filing fee of $25 is twenty-four times lower than the Notice of Exchange Transaction or Entity Conversion filing fee of $600, which is a significant savings in government filing fees.

Timing and Efficiency of Conversion of a California LLC into a California Professional Dental Corporation versus Dissolving a California LLC and Forming a New California Professional Dental Corporation

While not necessarily a direct cost like attorney’s fees and filing fees, when it comes to running a professional practice, time is money. No examination of conversion of a California LLC into a California Professional Dental Corporation would be complete without examining the timing and efficiency of conversion versus the dissolution of a California LLC and formation of a new California Professional Dental Corporation.

Timing and Efficiency of Conversion of a California LLC into a California Professional Dental Corporation

The conversion process from a California LLC to a California Professional Dental Corporation can be lengthy, potentially taking weeks or months to complete. At the time of this writing, Articles of Incorporation Conversion for converting a California LLC to a California Professional Dental Corporation may only be filed with the California Secretary of State in paper form. This limitation can impede business operations and cause delays in the provision of professional services.

Timing and Efficiency of Dissolving a California LLC and Forming a New California Professional Dental Corporation

In contrast, dissolving an existing California LLC and forming a new California Professional Dental Corporation is often more streamlined, allowing for a quicker transition and resumption of business activities. In addition, the process of forming a new California Professional Dental Corporation may be completed online via the website of the California Secretary of State, and with the payment of additional filing fees, a California Professional Dental Corporation may be formed within twenty-four hours of filing Articles of Incorporation. This allows licensed dentists to commence working under the new California Professional Dental Corporation in a short amount of time, allowing them to come into compliance with California Laws, specifically the California Corporations Code and California Business and Professions Code, as quickly as possible.

One Caveat to Timing and Efficiency Considerations is Insurance Paneling or other Vendor Relationships

Despite the potential for a more streamlined process in dissolving an existing LLC and forming a new California Professional Dental Corporation versus conversion of a California LLC into a California Professional Dental Corporation, there may be additional considerations that necessitate, or make more attractive, the conversion route.

For example, insurance paneling or other vendor relationships may make it necessary or advisable for a business to maintain continuity of existence through conversion from a California LLC to a California Professional Dental Corporation rather than dissolution of a California LLC and formation of a new California Professional Dental Corporation. In these cases, weighing the timing and efficiency factors against any necessary actions to maintain valuable relationships is crucial for licensed dentists to consider when choosing how to migrate their business entities and professional practices into California Professional Dental Corporations.

Tax Implications

Converting a California LLC to a California Professional Dental Corporation may involve both immediate costs and long-term costs, including certain tax implications with the California Franchise Tax Board. Depending on the circumstances, the taxation type of the California LLC, and the taxation type of the resulting California Professional Dental Corporation, transitioning to a California Professional Dental Corporation might have certain consequences with respect to tax, double taxation, and the option to elect S Corporation taxation. The tax advisors of the licensed dentists should be consulted prior to making a decision between conversion of a California LLC to a California Professional Dental Corporation or dissolving a California LLC and forming a new California Professional Dental Corporation.

Conclusion

In summary, while converting a California LLC to a Professional Dental Corporation may be the best choice, it is rarely least expensive choice when weighing filing fees, attorney’s fees, and other associated costs. From initial filing and attorney fees to potential tax implications, licensed dentists contemplating conversion of a California LLC to a California Professional Dental Corporation versus dissolution of a California LLC and formation of a new California Professional Dental Corporation should perform (or allow their tax advisors to perform) a thorough cost-benefit analysis to ensure the best method of migrating from a California LLC to a California Professional Dental Corporation is chosen.

A Permanent Paper Trail that the California Professional Dental Corporation Used to be a California LLC

When a California LLC converts to a California Professional Dental Corporation, the business records of the California LLC remain an integral part of the business records of the California Professional Dental Corporation. This permanent paper trail can carry significant implications for the newly formed California Professional Dental Corporation.

Articles of Organization and Articles of Incorporation

To initiate a conversion from a California LLC to a California Professional Dental Corporation, the California Secretary of State requires the filing of Articles of Incorporation Conversion. However, the original Articles of Organization of the LLC do not disappear and should not be discarded. Instead, these documents continue to exist within the business records, reflecting the founding history as a California LLC before conversion to a California Professional Dental Corporation. This archival process ensures that the California Professional Dental Corporation maintains a comprehensive record of its business history.

Operating Agreement and Bylaws

Maintaining the original Operating Agreement of a California LLC after conversion of the California LLC into a California Professional Dental Corporation serves several purposes, even after Bylaws are adopted by the California Professional Dental Corporation.

The Operating Agreement of the California LLC helps establish personal liability protection for owners during the time the corporate structure was a California LLC in the event of disputes between co-owners or third parties, which can be invaluable for providing context and clarity to the business practices prior to conversion and these records may help provide liability protections for disputes that arose from occurrences before the conversion.

Therefore, licensed dentists considering conversion from a California LLC to a California Professional Dental Corporation must not overlook the significance of the documents of their California LLC, as this past will continue to shape the operational landscape of the California Professional Dental Corporation after conversion.

Evidence of Providing Professional Services Out of Compliance with California Laws and Regulations and the Rules of the Dental Board of California

As discussed above, when a California LLC converts to a California Professional Dental Corporation, the conversion process does not eliminate the Articles of Organization or Operating Agreement of the California LLC. If after conversion the California Professional Dental Corporation is ever required to open to inspection its corporate records to the Dental Board of California regulating the profession for which the California Professional Dental Corporation is formed, this may lead the Dental Board of California to discover that prior to conversion, professional services were rendered without compliance with California laws and regulations, which could lead to consequences for the licensed dentists, other licensed professional shareholders, and their licensed professional employees when this information is discovered, which could lead to professional license consequences.

Risk Management Considerations for California Professional Dental Corporations

Licensed dentists practicing out of compliance by rendering professional services in a California LLC should consider the potential risks associated with their current business practices before initiating a conversion from a California LLC to a California Professional Dental Corporation. While dissolving a California LLC and forming a new California Professional Dental Corporation can only allow a licensed dentist to render professional services in compliance moving forward and does not fix past noncompliance, forming a new California Professional Dental Corporation does not require a licensed dentist to maintain business records highlighting past noncompliance together with the business records of their California Professional Dental Corporation the way California LLC documents must be maintained in the business records of a California Professional Dental Corporation resulting from a conversion from a California LLC.

The EIN of the California LLC May Change Upon Conversion to a California Professional Dental Corporation

When a California LLC converts to a California Professional Dental Corporation, one significant administrative change that business owners must consider is the potential requirement to obtain a new Employer Identification Number (EIN) from the Internal Revenue Service (IRS) following conversion.

The EIN, assigned by the IRS, serves as a unique identifier for tax purposes. In the context of converting a California LLC to a California Professional Dental Corporation, the EIN may need to be changed due to the transformation of the business structure if the taxation type of the California Professional Dental Corporation after conversion is different than the taxation type of the California LLC prior to conversion.

One of the most common reasons licensed professionals give to the experienced corporate attorneys at San Diego Corporate Law for their reason to elect conversion of a California LLC into a California Professional Dental Corporation is the desire to maintain their current EIN.

When Must a California Professional Dental Corporation Obtain a New EIN After Conversion from a California LLC?

An EIN is essential for tax administration and other financial operations, including opening business bank accounts or hiring employees. The IRS has specific rules regarding when a new EIN is required for a business entity that undergoes a structural change.

When a California Professional Dental Corporation is required to obtain a new EIN upon conversion from a California LLC is rooted in the distinct tax treatments associated with the different entity types. If the taxation type of the newly formed California Professional Dental Corporation varies from that of the original California LLC, a new EIN will be required.

For example, if the California LLC was disregarded for tax purposes or taxed as a partnership, the California Professional Dental Corporation will need a new EIN regardless of whether it is taxed as a personal service corporation or chooses to elect S Corporation taxation. However, if the California LLC was taxed as an S-Corp prior to conversion and the California Professional Dental Corporation should elect S Corporation taxation after conversion, the California Professional Dental Corporation should be able to maintain the EIN of the California LLC after conversion.

When Must a New California Professional Dental Corporation Obtain a New EIN After Formation?

While it is not always possible to maintain the EIN of a California LLC after conversion to a California Professional Dental Corporation, the alternative of dissolving a California LLC and forming a new California Professional Dental Corporation will always require a new EIN for the new California Professional Dental Corporation.

Conclusion

The conversion of a California LLC to a Professional Dental Corporation may lead to changes in the structure that require a new EIN, however under certain circumstances the EIN of the California LLC may be used by the California Professional Dental Corporation after conversion. However, when dissolving a California LLC and forming a new California Professional Dental Corporation, the new California Professional Dental Corporation will always require a new EIN.

FinCEN Beneficial Ownership Information Report Issues if California LLC to be Converted into a California Professional Dental Corporation was Formed by an Online Incorporation Service or Non-Responsive Attorney or Accountant

In the process of converting a California LLC into a California Professional Dental Corporation, particular attention must be paid to the requirements set forth by the Financial Crimes Enforcement Network (FinCEN) regarding the filing of an initial or updated Beneficial Ownership Information Report. If the California LLC was established through an online incorporation service or with the assistance of a now unresponsive attorney or accountant, there may be significant challenges in complying with the FinCEN Beneficial Ownership Information Reporting requirements.

While there should not be an issue with updating Beneficial Ownership Information following conversion from a California LLC to a California Professional Dental Corporation, unfortunately the experienced corporate attorneys at San Diego Corporate Law have been confronting issues caused by online incorporation services as well as attorneys and accountants who have formed California LLCs for licensed professionals. This section will explore a few of the potential issues arising from the lack of adequate documentation and professional guidance which can impede the successful conversion and pose risks related to regulatory compliance.

What is FinCEN Beneficial Ownership Information Reporting?

The Financial Crimes Enforcement Network (FinCEN) requires business entities, including California Professional Dental Corporations, to report beneficial ownership information under the Corporate Transparency Act of 2021.

This federal reporting mandate requires companies to disclose identifying details of individuals who own or control the entity, such as name, home address, date of birth, and unique identifying numbers from, and a copy of, a government-issued identification, driver’s license, or passport.

In addition, business entities formed on or after January 1, 2024, must also disclose the identity of their “Company Applicants” who are persons such as employees of online filing services, attorneys, accountants, and other persons who assisted in the formation of the business entity.

The purpose of this requirement is to enhance transparency and combat money laundering and other illicit financial activities. Compliance with the FinCEN reporting standards is critical, as failure to provide accurate beneficial ownership information can result in substantial penalties and legal repercussions for the entity, including without limitation, civil penalties of up to $500 per day of noncompliance and criminal penalties of up to $10,000 and/or imprisonment for two years.

What Information About a Company Applicant Must be Disclosed in a FinCEN Beneficial Ownership Information Report?

Under the Corporate Transparency Act, business entities are required to disclose specific information regarding their Company Applicants in the FinCEN Beneficial Ownership Information Report. This information includes the full name, residential or business address, date of birth, and unique identifying number from a government-issued identification (such as a driver’s license or passport) of each Company Applicant.

In the alternative, Company Applicants may elect to obtain a unique FinCEN ID, which is a number assigned to a Company Applicant who provides their name, residential or business address, date of birth, and unique identifying number from, and a copy of, a government-issued identification, driver’s license (such as a driver’s license or passport) to FinCEN. This allows a Company Applicant to include their FinCEN ID on Beneficial Ownership Information Reports without providing their address, date of birth, and unique identifying number from, and a copy of, their government issued identification, driver’s license, or passport to their clients.

In addition to not having to provide their address, date of birth, and unique identifying number from, and a copy of, their government issued identification, driver’s license, or passport to their clients, a Company Applicant using a FinCEN ID may update any changes to their reported information one time with their FinCEN ID rather than on hundreds, thousands, and possibly tens or hundreds of thousands of Beneficial Ownership Information Reports on which their information is reported.

The Current Issue with Company Applicant Information from Online Incorporation Services, Non-Responsive Attorneys, and Non-Responsive Accountants

At the time of this writing, less than a year after FinCEN Beneficial Ownership Information Reporting started, the experienced corporate attorneys at San Diego Corporate Law have already encountered significant issues requesting the required Company Applicant information from online incorporation services, non-responsive attorneys, and non-responsive accountants.

Company Applicant Information from Online Incorporation Services

At the time of this writing, most if not all online incorporation services only provide clients with submission receipts for FinCEN Beneficial Ownership Information Reports they filed, but not the transcripts of the actual reports filed. Presumably, this is to protect the personal information of their employees who act as Company Applicants. However, this could be an excuse to make it impossible for a client to file an updated Beneficial Ownership Information Report without the assistance of the online incorporation service.

This is not an issue with one or a few small online incorporation services, this is a uniform issue across all of the major online incorporation services. There is no excuse for these online incorporation services to not have their employees who act as Company Applicants to obtain unique FinCEN IDs and provide filing transcripts to their clients without locking clients in and forcing them to continue only using that specific online incorporation service by depriving clients of information about the formation of their own business entities need to stay in compliance with FinCEN Beneficial Ownership Information Reporting requirements.

Company Applicant Information from Non-Responsive Attorneys and Non-Responsive Accountants

The challenges associated with obtaining Company Applicant information are not limited to online incorporation services; clients also face difficulties when trying to receive necessary data from non-responsive attorneys and non-responsive accountants. Company Applicants play a critical role in the formation and compliance of business entities, and their lack of communication and prompt action can hinder the ability of clients to comply with FinCEN regulations.

Still within the first year of FinCEN Beneficial Ownership Information Reporting, several clients of San Diego Corporate Law have encountered delays or the inability to receive Company Applicant information from non-responsive attorneys and non-responsive accountants who formed California LLCs for these clients instead of the California Professional Dental Corporations, making it impossible for these clients to comply with FinCEN Beneficial Ownership Information Report requirements. If an attorney or accountant is unwilling to either share their address, date of birth, and unique identifying number from, and a copy of, their government issued identification, driver’s license, or passport with their past and present clients, they should at least be willing to obtain a unique FinCEN ID for use on initial or updated FinCEN Beneficial Ownership Information Reports of their past clients.

The Future Issue with Company Applicant Information Without the Use of a FinCEN ID

As compliance with FinCEN Beneficial Ownership Information Reporting evolves, the absence of a unique FinCEN ID for Company Applicants may lead to escalating complications.

Without providing a unique FinCEN ID to clients, Company Applicants expose their clients to future vulnerability for noncompliance with the strict FinCEN Beneficial Ownership Information Reporting requirements. Even if well intentioned, employees of online services move on to other jobs, attorneys and accountants relocate, retire, become incapacitated, and pass away just like every other human being.

When a Company Applicant fails to use a unique FinCEN ID, or when an online incorporation service, attorney, or accountant who acts as a Company Applicant fails to provide their clients with their unique FinCEN ID, they seriously endanger their clients. The ongoing struggle to obtain timely Company Applicant information underscores the urgency for clients to ensure they are given Beneficial Ownership Information Report transcripts, not just filing receipts, to ensure their ability to comply with FinCEN Beneficial Ownership Information Reporting requirements in the future when employees of online incorporation services, attorneys, and accountants move on to other jobs, relocate, retire, become incapacitated, or pass away.

The Corporate Attorneys at San Diego Corporate Law Use Unique FinCEN IDs as Company Applicants and Always Provide Both a Filing Receipt and Filing Transcript for Every FinCEN Beneficial Ownership Information Report

The corporate attorneys at San Diego Corporate Law distinguish themselves by using unique FinCEN IDs as Company Applicants for each and every FinCEN Beneficial Ownership Information Report. This practice ensures that all relevant information is accurately tracked and easily accessible for compliance purposes.

Furthermore, the attorneys at San Diego Corporate Law provide both a filing receipt and a filing transcript for every FinCEN Beneficial Ownership Information Report submitted. This dual documentation approach not only enhances transparency but also empowers clients with the necessary information to remain compliant with evolving regulatory requirements, reducing the risk of potential noncompliance associated with reliance on third parties.

Conclusion

Converting a California LLC to a California Professional Dental Corporation is a significant decision that requires careful consideration, particularly regarding the availability of Company Applicant information. Without either the FinCEN ID or address, date of birth, and unique identifying number from, and a copy of, their government issued identification, driver’s license, or passport of the Company Applicant, clients may face substantial compliance challenges after conversion and should consider dissolution of their California LLC and forming a new California Professional Dental Corporation as the only option.

Therefore, before proceeding with conversion of a California LLC to a California Professional Dental Corporation, the client should ensure they possess all required Company Applicant information in the form of a unique FinCEN ID for each Company Applicant.

Contact San Diego Corporate Law Before Converting a California LLC to a California Professional Dental Corporation

Before converting a California LLC to a California Professional Corporation, it is crucial to understand the implications and prerequisites involved in this process. Our experienced team at San Diego Corporate Law is ready to guide you through every step, ensuring you have all necessary information to decide when conversion of California LLCs to California Professional Corporations or dissolution of the California LLC and formation of a new California Professional Dental Corporation is the best choice. Secure your compliance and protect your interests by contacting San Diego Corporate Law—reach out to us today for a consultation today.