What is a Change of Business Entity?
A change of business entity, also called business entity conversion or statutory conversion, is the legal process of converting your current business entity into another business entity, without having to form a new entity or dissolve your current entity. For example, changing your business entity from an LLC to a corporation. The LLC in this example is the converting entity, or the existing entity before a conversion takes place, and the corporation would be the converted entity, or the entity resulting from a conversion.
Companies can change their legal structure for different reasons. An LLC may want to convert to a corporation so it can start giving employees business shares, save money on taxes, or even to attract some venture capitalists. On the flip side, a corporation may want to convert to an LLC to take advantage of the LLC’s pass-through taxation (where taxes pass through the business and onto the owners), decision-making flexibility, or simply to avoid all the constant administrative paperwork.
A business entity conversion is touted as one of the least complex and inexpensive ways to change a business entity compared to other options, such as a merger, a non-statutory conversion, or a dissolution/formation process, which requires dissolving the old entity and forming a new entity. The business entity conversion, if available in your state, is generally your best option.
If the converted entity will end up with a different domestic state (or “home” state) than the converting entity, this is referred to as Domestication and there will be additional steps to take. Domestication can also refer to just the change or conversion of the home state.
How do I Change my Business Entity?
Changing your business entity is done through the Secretary of State, and while each state has its own rules, generally there are at least three parts: a plan of conversion document, business formation documents for the converted entity, and a certificate of the conversion. These three documents are usually available on the Secretary of State’s website. Most states authorize a business entity conversion, although it’s a fairly new concept that some states aren’t on board with yet.
A Plan of Conversion is a document of terms and conditions for the conversion, dictated by state statute. This document includes organizational information such as rights and responsibilities of each member. A Plan of Conversion is a required filing alongside the other required conversion filings. At minimum, a plan of conversion typically includes at least the following information:
- The converting entity’s name
- The converted entity’s name
- A statement of “continuing existence”
- A statement of approval for the conversion
The Articles of Incorporation, or equivalent business formation document depending on the entity type you chose, is required for the converted entity. You’ll usually file these to the Secretary of State at the same time as the certificate of the conversion, along with the required fees.
The Certificate of Conversion, also known as the Articles or Statement of Conversion, is the document that officially puts your business entity conversion into effect. This conversion document includes basic information about both your converting and converted entities. In addition to basic information, the Certificate of Conversion typically includes at least the following information:
- Approval statement of the Plan of Conversion
- Effectiveness details of the filing
- Tax status information
The state statutes regarding conversion vary among states, although generally the ownership interests and liabilities all transfer over to the converted entity. There may or may not be tax consequences depending on your converting and converted entities.