Entity Conversion Can Be Easy – If You Know What You Are Doing

This post about entity conversion is an expanded version of an answer that I provided on Quora yesterday. (How do I convert a Delaware LLC to a California LLC?)

In my experience, entity conversion typically occurs for either, or both, of the following reasons.

1. The need to convert a limited liability company (LLC) to a corporation to accept an investment from an institutional investor, such as a venture capitalist.
2. The need to move an entity from one state to another. This typically occurs because the founder relocates, or because an investor prefers to invest in a Delaware corporation.

Deciding Whether Entity Conversion Is Possible

The first step is to decide whether the desired entity conversion is possible. This is essential because the conversions that are permitted vary from state to state.

This is done by consulting the Secretary of State website(s) for the applicable state(s). Examples:

• California – The Conversion Information page discusses which conversions are permitted and provides links to the applicable filing forms.  (Note: Corporations Code Section 1151 permits California corporations to convert to other types of California entities, but not to entities in other states.)
• Delaware – The Conversion Of Entity Type page shows that Delaware permits a wide variety of conversions and provides links to the applicable filing forms.

Entity Conversion Steps

If the desired entity conversion is possible, then the steps to be taken are as follows.

1. Prepare a plan of conversion. This document describes the converting and converted entity and jurisdiction; specifies how equity interests will be converted; and includes any other relevant terms and conditions.
2. Have the plan of conversion approved by the appropriate body in the converting-from entity. (For example, a corporation’s shareholders or an LLC’s members.)
3. Prepare the applicable form required by, and file it with, the converting-from Secretary of State.
4. Prepare the applicable form required by, and file it with, the converting-to Secretary of State.

In summary, entity conversion can be easy if you know, and you follow, the rules.

Related post: How Can I Move My Corporation to Another State?

Dana H. Shultz, Attorney at Law  +1 510 547-0545  dana [at] danashultz [dot] com
This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact a lawyer directly.