US: Tips on converting a corporate entity
Companies may have several reasons for converting their entity type to another form - among them administrative costs, corporate governance requirements, or issues arising from tax, or accounting concerns. In many states, company laws allow for “statutory conversions”: through a simple filing with the Secretary of State, you automatically convert to another entity type. In states where conversions are not expressly allowed by statute, companies can usually accomplish the same goal by forming a new entity and merging the old with and into the new one.
Begin by drafting a plan that describes the terms and conditions of the conversion.
Companies interested in converting their entity type should begin by drafting a plan of conversion that describes the terms and conditions of the conversion. The plan should address certain basics. For example, what types of interests will the shareholders/members receive in the new entity, upon conversion? At what point in time will the conversion be effective? Will the directors/officers of the converted company be the same as they were prior to conversion? Who will handle any third-party notifications that arise as a result of the conversion?
It will be essential to review the governance documents of your entity prior to filing any conversion documents with the state in which your company is organized. These governance documents will usually specify whether any additional approvals (beyond statutory approvals) are required for the entity to convert.
If the documents are silent on such approvals, the state statute will guide you, setting out the minimum required corporate approvals.
When it comes to actual filing, each state has its own forms and filing fees, most of which can be found online by visiting the state’s governing website. For example, Delaware’s Conversion of Entity Type forms can be found here.
Companies should also consider whether any third parties need to be notified, either prior to or after the conversion. Your company may be party to contracts that contain notice/consent provisions in the event the company undergoes a change in entity type.
Similarly, if your company is registered to do business in a foreign jurisdiction, you may need to notify that jurisdiction of the company’s new form.
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