THE NEW HAMPSHIRE Interest and Dividends Tax (the "I&D Tax") imposes a tax at a rate of 5 percent on all corporate dividends received by New Hampshire residents. The I&D Tax, when combined with the 8.5 percent tax imposed on New Hampshire corporations by the New Hampshire Business Profits Tax, creates for New Hampshire business owners one of the harshest state tax environments in the United States.

However, the "statutory conversion" provisions principally contained in Section 11.09 of the New Hampshire Business Corporation Act (the "BCA") and Sections 17-a and 17-b of the New Hampshire Limited Liability Company Act (the "LLCA") provide a means whereby New Hampshire corporate shareholders can entirely avoid the I&D Tax. This is because under RSA 77:4, III, the I&D Tax does not apply to distributions received by members of LLCs that have "nontransferable shares."

Thus, if a New Hampshire state-law business corporation formed under the BCA elects under the above statutory conversion provisions to convert to an LLC, then, as long as, under its LLC agreement and under the LLCA itself, its LLC interests (or, to use terms that are more technically correct, the membership rights that it issues) are nontransferable within the meaning of the I&D Tax, its members will not be subject to the I&D Tax. This holds true even though, for federal tax purposes, their LLC remains a C or S corporation.

Furthermore, from business organization law viewpoint, the converted corporation is the same legal entity after the transaction as before.

This is not to say that the process of accomplishing the statutory conversion of a New Hampshire corporation to an LLC will be simple or quick. Your clients shouldn’t try it at home. On the contrary:

• The process must be preceded by an exhaustive review of the minute books of the corporation in question and of all of the corporation’s legal arrangements with banks, suppliers and other third parties. This review is necessary to ensure, among other things, that the conversion will not have unanticipated legal impacts, such as debt accelerations or unfair treatment of minority shareholders. Even more importantly, such a review is necessary in order to detect legal arrangements that may have adverse tax consequences for the conversion in question. Thus, the review can be accomplished effectively only by lawyers and accountants who can anticipate the full tax ramifications of such conversions.
• The conversion must be structured and implemented in a manner that meets all applicable requirements for treatment by the Internal Revenue Service as an "F" reorganization under Internal Revenue Code ("IRC") Section 368(a)(1)(F) and the regulations thereunder. This implementation requires, among other things, the drafting and adoption of a "plan of reorganization" that complies with Regs. Section 1.368-3; the filing of one or more critical IRS forms under Regs. Section 1.7701-2; the proper annotation of these forms in order to avoid IRS misinterpretation; and compliance with detailed IRS reporting obligations. Otherwise, the conversion may result in a deemed corporate liquidation and thus the application of the IRC’s "corporate death taxes" under IRC Sections 331 and 336.
• If, as will often be the case, the New Hampshire corporation in question has elected to be an S corporation, the LLC agreement of the converted entity must be drafted with great care to eliminate any possibility that, at the time of the conversion or thereafter, the mandatory, default or permissive rules of the LLCA will cause that election to terminate. The relevant LLCA rules are numerous; they include, among many others, the charging order provisions of LLCA Section 47 and the myriad LLCA statutory provisions relating to allocations of profits and losses and to interim and liquidating distributions of LLC profits and other assets. For lawyers drafting LLC agreements for business corporations that are being converted to LLCs and that have made an S election, the Subchapter S single-class-of-stock rules can create particularly dangerous pitfalls.

However, if all of the above tax and legal requirements are met, the shareholders of a New Hampshire business corporation that converts to an LLC can save I&D Taxes amounting each year to thousands or even tens of thousands of dollars.

What does this mean for New Hampshire lawyers who regularly represent corporate clients but who are not expert in federal or New Hampshire tax? In my view, it means that, at the very least, these lawyers should advise their clients of the remarkable I&D Tax savings potentially available to these clients if they convert their business corpo rations to LLCs, and attorneys should encourage their clients to explore the possibility of effecting such a conversion. New Hampshire non-tax lawyers should also advise their clients, if they have not already done so, that by making such a conversion, they can obtain the unique legal advantages that LLCs have over business corporations, including the remarkable statutory asset protection available under the above LLCA Section 47. This protection is wholly unavailable under any corporate statute.

Lawyers who give the above advice to their corporate clients may enable these clients to achieve a potentially major tax saving of which they may otherwise be wholly unaware. In addition, these lawyers may thereby effectively assist in obtaining a significant reform of the brutally anti-business New Hampshire state tax system.

Home | About the Bar | For Members | For the Public | Legal Links | Publications | Online Store
Lawyer Referral Service | Law-Related Education | NHBA•CLE | NHBA Insurance Agency | NHMCLE
Search | Calendar

New Hampshire Bar Association
2 Pillsbury Street, Suite 300, Concord NH 03301
phone: (603) 224-6942 fax: (603) 224-2910
email: NHBAinfo@nhbar.org
© NH Bar Association Disclaimer