The limited liability company (LLC) and the corporation are both formal business entities with plenty of their own advantages and disadvantages.
When you’re first forming your business, one or the other might seem like the right fit, but as your business grows and matures, you may realize that the other entity type would better suit your company.
While there are three different ways to convert a business from one entity type to another, we always recommend the statutory conversion when possible. What is the statutory conversion, and why is it the preferred method for business entity conversions?
In this article, we’ll break down everything you need to know about the statutory conversion.
The statutory conversion is the simplest way to convert your business from one entity type to another. Statutory conversions were introduced into the American business world fairly recently, and as such, they’re still only available in 35 states.
This process has some variance from state to state, but in general, it starts with the company’s ownership group agreeing to convert the business entity type and drafting a conversion plan. Then, those owners need to hold a vote to approve the conversion. In a corporation, you’ll need to provide the company’s stockholders with the plan so they can vote on it, while in an LLC, you just need a majority of the company’s owners to approve the plan.
The next step is to draft and file the certificate of conversion. The exact information needed to complete the certificate of conversion can vary depending on which state you’re converting an entity in, but generally speaking, you’ll need to provide the Secretary of State with the following information:
You will also need to prepare and file the formation documents for the business entity you wish to convert to — the articles of organization for an LLC, or the articles of incorporation for a corporation. Finally, you’ll need to formally dissolve your original business entity, and your statutory conversion is complete.
The statutory merger is no longer the most popular method for converting one type of business to another, but it is still used frequently in a handful of states. The statutory merger starts with the formation of a brand-new business entity, followed by a vote to approve a merger between your existing entity and the new one.
Then, your business owners will need to voluntarily and formally trade in their ownership in your previous entity for ownership shares in the new entity. Finally, you’ll need to draft and file a document usually called a certificate of merger with your Secretary of State to officially merge the two companies.
There is also a third method called the nonstatutory conversion which is hardly ever used these days. In general, the nonstatutory conversion is similar to the statutory merger, but while each step in the statutory merger is a relatively seamless and automatic process, with a nonstatutory conversion each step needs separate transfer documents.
If this process sounds like more of a hassle than you’re willing to take on, or if you would rather have the peace of mind that each step was completed correctly by a professional, you do have some options. You could hire a business attorney to convert your business entity, although this is an extremely expensive route that could see your expenses climb into the thousands of dollars.
Another option is to hire a business services company. While there aren’t nearly as many options as there are for forming an LLC or corporation, there are still several reputable companies offering business conversion service. Take a look at a few of our favorite options:
The statutory conversion is by far the easiest and most popular way to convert one entity type to another, but it’s still not available in all 50 states. Therefore, if you own a business in one of the 15 states that doesn’t allow statutory conversions, you’ll need to do a statutory merger instead.
If either process gets overwhelming, keep in mind that there are reputable companies that can help you out. If you run into any trouble, give Swyft Filings, LegalZoom, or BizFilings a call and they’ll handle the process on your behalf.
We hope this article helped you develop your understanding of the statutory conversion!
Disclaimer: The content on this page is for information purposes only and does not constitute legal, tax, or accounting advice. If you have specific questions about any of these topics, seek the counsel of a licensed professional.
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