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**