What this is: As your business grows, you may consider changing your company from one type to another, to account for new tax codes, additional investors and more. You might also want to consider a move from your state of domestication.
What this means: There are ways to do this that won’t require you dissolving your company and forming a new one. Let’s take a look at the conversion process.
Sometimes we may embrace it, sometimes we may dread it, but there is no escaping change. Like people, companies undergo many changes throughout their life cycles and are affected by many external circumstances that change as well. Sometimes these changes, such as business growth, diversification or amendments to the tax code mean that a company may benefit by changing its entity type. So, for example, a company may have begun as a limited liability company, but as it grows and takes on investors, it may decide it would be better off becoming a corporation. Or, it may have started out with a domestic state of Texas, but now wishes to become a Delaware company.
Statutory Conversions Can Simplify the Process
Statutory conversions, which began to be allowed by business statutes in the early 2000’s, can make the process simpler for companies that want to change from one entity type to another or move from one state to another. There is no need to form a new company and no need to transfer assets or assign contracts, as would need to be done if the company dissolved the old entity and formed a new one. It is also usually considered simpler than forming a new company and merging the existing entity into the new one.
Each state handles the process for conversion differently and not all states allow conversions in all situations. This becomes particularly important if the company wishes to convert from one domestic state to another. Generally speaking, conversion statutes that allow an entity to move from one state to another require that the conversion is allowed by both states.
The process for conversion usually involves the following steps:
- A plan of conversion is drafted and approved. The advice of an attorney is crucial at this point to ensure that the goals and objectives of the company will truly be met through the process of conversion, and there are no unintended consequences or issues arising from the transfer of the assets, obligations, liabilities etc. from the old company to the new.
- A Certificate of Conversion is filed in the domestic state, often accompanied by formation documents for the converted company.
- Filings must be made to reflect the conversion in all states where the company is registered to do business.
Conversions by State
Today we will look at the conversion filing provisions for four key states, reviewing requirements for domestic corporations and limited liability companies that wish to change company type, move the company to a new state or both. We will also discuss how a foreign company registered in that state would reflect the filing of a conversion in its domestic state.
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Conversions in Delaware
- Corporations can convert to another company type including LLCs, trusts, partnerships (limited and general) or other unincorporated businesses.
- Limited Liability Companies can convert to another company type including corporations, trusts, partnerships (limited and general) or other unincorporated businesses.
- Corporations or LLCs can convert to another company type including LLCs, trusts, partnerships (limited and general) or other unincorporated businesses.
What to File in Delaware: Certificate of Conversion and, if the resulting company will be registered in Delaware, appropriate certificate filed upon formation (Certificate of Incorporation, Certificate of Formation, etc.)
How to Reflect the Conversion of a Foreign Company Registered in Delaware (entity is not becoming a Delaware company as a result of the conversion):
- For all situations: Withdraw existing registration and re-qualify the converted entity
Conversions in California
- Corporations and LLCs can convert to any other type of California or foreign business
(Note: An amendment effective 1/1/2023 allowed corporations to convert to foreign entities, which - previously was not permitted.)
What to File in California:
- Converted company will be a domestic registered California company: File a specific formation form that reflects conversion. Forms vary based on entity type of converting and converted company. For example, if the resulting entity is a California LLC, file Limited Liability Company Articles of Organization – Conversion (Form LLC 1-A).
- Converted company will be domestic to another state: File Certificate of Conversion (CONV-1A).
How to Reflect the Conversion of a Foreign Company Registered in California:
- Withdraw existing registration and re-qualify the converted company.
Conversions in Illinois
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Corporations and LLCs can convert into any other type of entity, foreign or domestic, or a foreign entity of any type can convert to a domestic corporation or LLC.
- Corporations and LLCs can convert into an entity of the same type in another state, or an entity of the same type in another state can become domestic to Illinois through the process of domestication.
What to File in Illinois:
- Conversion: Statement of conversion accompanied by the formation documents of the converted entity regardless of whether it is a foreign or domestic entity.
- Domestication: Statement of domestication accompanied by the formation documents of the resulting entity if it is a domestic entity.
How to Reflect the Conversion of a Foreign Entity Registered in Illinois:
- Foreign LLC or LP that has changed jurisdiction only: File amendment with good standing certificate from the domestic state of the resulting entity, and a certified copy of the filed conversion or re-domestication certificates from the domestic state.
- To reflect all other types of conversions: Withdraw existing registration and re-qualify the converted company.
Conversions in New York
Conversion statutes in New York only allow the conversion of a general partnership or limited partnership into a limited liability company, either creating a new LLC as a result of the conversion or converting into an LLC that was previously formed. When a New York corporation or LLC wishes to change company type or jurisdiction, the entity can either do a “non-statutory conversion”, i.e. transfer assets to a newly formed entity and dissolve or create a new entity and merge the old entity into it.
Conversions Not Permitted:
- Corporations cannot convert to any other company type.
- Limited Liability Companies cannot convert to any other company type.
How to Reflect the Conversion of a Foreign Company Registered in New York:
- LLC: If the company type or domestic jurisdiction has changed, withdraw the existing registration, and re-qualify the converted company.
- Corporation: If only the jurisdiction of incorporation has changed, file a Certificate of Amendment. If the entity type has changed, withdraw the existing registration and re-qualify the converted company.
Importance of Understanding Procedures and What's Allowed
As you can see from the examples above, each state handles the process of conversion a little differently and laws continue to change and become more flexible in many states. It’s important to understand what types of conversions are allowed in the pertinent states when planning this important change, as well as the state filing procedures and requirements to ensure the changes to the public record are made appropriately. It is also important to ensure the change made in the domestic state is properly reflected in every state where the company is registered to do business.
FAQS
What needs to be done on the public record for a conversion?
To effectively help you convert your existing business entity type, the first step is to obtain appropriate legal counsel to assist in the following areas:
- Determine whether conversion is the right step to accomplish your objectives.
- Draft and provide advice on the plan of conversion which will determine how to best convert the interests, obligations, securities and rights of the converted entity to the converting entity.
Once the plan of conversion is drafted, a service company can assist with the following public record requirements needed in the conversion process:
- Verification of the entity status and availability of the converted entity name, if needed.
- Review of the statement of conversion or other public records filing required to effect the conversion.
- Research of state requirements for these filings.
- Planning approach to ensure acceptance and desired date of filing.
- Submitting documents for preclearance, as needed.
- Filing documents in-person, nationwide.
- Following up to ensure filing was accepted and to remedy any problems.
- Providing you with evidence of filing when the process is complete.
What are the primary types of conversions?
Statutory conversion – This is a streamlined filing procedure, available in many states, that allows you to convert your company from one entity type to another (after the plan of conversion is approved) by filing a statement of conversion or similar forms with the Secretary of State’s office. This tends to be the easiest method to convert. Each state that permits statutory conversions has its own state specific forms and requirements, so please always refer to the state’s statutes.
Non-statutory conversion – In this case, the entity transfers its assets to a newly formed entity of a different type, and then dissolves.
Statutory merger can also be used if the state does not allow for a statutory conversion. The specific requirements will also vary from state to state. For more, check out our article How to Conquer Conversion Aversion.
What is an LLC Division and how does it work?
Division of an LLC essentially works like a merger in reverse.
First, an LLC drafts a ‘plan of division’ which lays out the terms and conditions for allocating its assets, property, rights, debts, liabilities and duties to the resulting LLCs. Division allows an LLC to split off separate lines of business, assets or holdings, where each newly created LLC ends up with a portion of the assets and liabilities of the original LLC. Once the plan of division is in place, a Certificate of Division is filed along with Certificates of Formation for the resulting LLCs that are outlined in the plan. For even more information, read our article, Certificate of Division: LLC Division In Delaware.
This article is provided for informational purposes only and should not be considered, or relied upon, as legal advice.
