The legal structure of your business is not an inconsequential component of the company. Depending on the objectives you have for your business, you may want to form a limited partnership, limited liability company (LLC), or corporation. Despite spending a good amount of time upfront considering a business type, you might encounter a situation where it is prudent to change its structure.
Entity Conversion is Not the Same as Business Domestication
Before we dive into statutory conversion and other ways of changing your company’s legal structure, we should make it clear that business domestication is a separate action altogether. Business domestication refers to the process of forming your business in a particular state. You might want to think twice before simply forming your business where you live.
How Can You Change Your Company’s Entity Type?
Many states have a process available for business owners to convert their existing business into a different type. This process is referred to as “statutory conversion.” Before states began adopting a statutory process for changing business entity types, owners usually had to wind down operations at their existing enterprise, form a new company, and transfer assets into the new company. Statutory conversion differs from state to state, but it typically involves:
- An affirmative vote on converting from current owners or shareholders;
- A conversion plan;
- A certificate of conversion; and
- Formation documents (for the new business).
A slightly more involved process is statutory merger. This involves setting up another company while your current one continues its operations. Owners will need to approve the merger on behalf of both companies and file important conversion documents. A statutory merger is more complicated than a statutory conversion but almost always preferable to liquidating a current business.
Why Would You Change Your Company’s Entity Type?
Plenty of sole proprietors eventually form LLCs for their businesses, which can be thought of as an entity conversion. LLCs are popular because they offer limited liability for members while avoiding double taxation like you would encounter with a corporation.
Another common conversion is from an LLC to a corporation. This is often used for LLC members who want to continue expanding their company’s footprint or take on more funding.
Thinking of Making a Change?
Even with statutory conversion, there are numerous considerations you need to address when changing the legal structure of your company. For example, you need to create a thorough operating agreement when your sole proprietorship is ready to step up to an LLC. Whatever your reasons for seeking an entity change, Lockhart IP is here to help you achieve your goals. We’re ready to talk when you are.