Entity Conversion: Not a One-&-Done

As founders fundraise this fall, one of the recurring questions we have received during various intakes is whether it is possible to convert from a California limited liability company (“LLC”) to the more traditional vehicle for startups seeking equity investment by institutional investors -- a Delaware C corporation.  

The short answer is yes; the long(er) answer is yes, but it is or may likely be complicated.  

Statutory provisions for conversion purposes are found in the California Corporations Code commencing with sections 1150, 3300, 15911.01, 16901 and 17710.01.  For California LLCs, conversion may be effectuated only if: (1) the laws of the converting entity and converted entity expressly permit the creation of that converted entity pursuant to a conversion; and (2) the conversion complies with any and all other applicable California and foreign laws.  

Here in California, LLCs may convert into a Delaware C corporation by filing Certificates of Conversion with the California and Delaware Secretaries of State.  LLCs must also concurrently file their Certificate of Incorporation with the Delaware Secretary of State upon submitting the Certificate of Conversion.  

However, there are other concerns that founders often overlook during the conversion process, namely:

• What approvals must be obtained from the members of the LLC in order to effectuate the transaction?
  
• Has the LLC entered into any existing agreements requiring a separate consent to be obtained before the conversion?
  
• Are there possible tax consequences that could result from the conversion from a California LLC to a Delaware C corporation? This is a crucial issue to consider when converting any LLC to a corporation, and it is important to consult with accountants or tax professionals regarding this aspect of the transaction.
  
• What is the timeline for receiving money, and will the regular processing times associated with the conversion process slow or delay the receipt of investment?  If so, are you willing to pay for expedited processing fees?
  
• From an incorporation perspective, once the California LLC no longer operates as an LLC and is, in fact, converted to a corporation, what documents need to be in place to properly form the corporation (i.e., Bylaws, Board Resolutions and Minutes, etc.) and to issue shares to owners (i.e., Share Certificates, Restricted Stock Agreements, etc.)?
  

Converting across entity types and across state lines is never a simple process or a simple filing.  It is highly specific and dependent on previous activity and agreements by the LLC, and its future goals.  

Smith Shapourian & Mignano, PC is available to answer any questions or concerns you may have regarding conversion.  

This blog does not constitute solicitation or provision of legal advice, and does not establish an attorney-client relationship. This blog should not be used as a substitute for obtaining legal advice from an attorney licensed or authorized to practice in your jurisdiction. You should always consult a suitably qualified attorney regarding any specific legal problem or matter in a timely manner, as statutes of limitations may bar your claim.