How to convert an LLC into a Corporation

There are times in the life of a business when one business form has to be converted into another.  For example, a startup may have initially decided to form an LLC in order to pass through the LLC's losses to the owners' tax returns, thereby allowing them to deduct such losses from their other non business related income.  Now the startup is seeking venture capital financing and the venture capital investors won't invest in an LLC (as is often the case).  Consequently, the business needs to convert to a corporation.  How is this accomplished?

If you are dealing with an LLC formed under the laws of Delaware,  look in Section 18-209 et seq. of the Delaware Limited Liability Company Act.  This provision allows for a merger* or consolidation** of a Delaware LLC with a Delaware corporation or a corporation formed under any foreign law.  If all of the procedures are followed, you will end up with a corporation where you used to have an LLC.

If you have an LLC formed under the laws of New York, look in Section 1001 et seq. of the New York Limited Liability Company Law.  Under these provisions, a New York LLC can also merge or consolidate with a New York corporation or a corporation formed under any foreign law.  Again, you will end up with a corporation where you used to have an LLC.

If you are considering a conversion of an LLC into a corporation, make sure to check with your accountant, attorney and/or tax adviser.  There may be important tax and other legal consequences to consider before making the move of converting an LLC into a corporation.

* A merger generally means that two business entities (A and B) become one business entity, either A or B.  If A survives, B ends and vice versa.

** A consolidation generally means that two business entities (A and B) become one new business entity, C.  A and B end.

**This post is for informational purposes only and does not constitute legal advice**

Comments

[Merlin]

There are times in the life of a business when one business form has to be converted into another.

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although a business entity, is a type of unincorporated association and is not a corporation. The primary characteristic an LLC shares with a corporation is limited liability, and the primary characteristic it shares with a partnership is the availability of pass-through income taxation. It is often more flexible than a corporation and it is well-suited for companies with a single owner.

[Nick Jones]

If you are converting an LLC (Delaware or otherwise) to a Delaware corporation, you also need to be aware of Section 265 of Delaware's corporate code. It requires filing a certificate of conversion with the DE sec. of state.

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