If you have a startup, you have likely heard many times that you must be a Delaware Corporation. What happens if you formed as an LLC in your home state?
Fortunately, Delaware allows for a simple entity conversion from a LLC (Delaware or non-Delaware) to a Delaware Corporation. Thus, founders can convert their company to a Delaware corporation without much fuss from a legal perspective.
The process is straight-forward in that it requires only the filing of some basic forms, and does not require forming another corporation or dissolving the current LLC. All of the current LLC’s property is automatically transferred to the new corporation, along with its debts and liabilities.
That said, the usual steps of the conversion process are as follows:
1. Determine if the LLC’s home state allows for entity conversion in Delaware. The easiest way to check if such a conversion is permitted is to review the guidelines for entity conversion on the Secretary of State’s website of the LLC’s respective home state. If the home state does not allow such a conversion, conversion is not impossible, but will be more complicated than discussed in this post. If the home state does allow for conversion to a Delaware corporation, then you can proceed to step two.
2. Prepare a plan of conversion and get it approved by the current LLC members. The plan should meet the requirements of both the LLC’s home state and Delaware. This plan of conversion must be approved in accordance with the LLC’s governing documents and state law. To determine how many or what percentage of the members must approve the conversion, check the LLC’s certificate of formation and operating agreement.
3. File the entity conversion documents in the home state and in Delaware. Following approval by the LLC’s members and/or managers, the applicable entity conversion forms required by the home state should be filed with that jurisdiction’s Secretary of State, and the certificate of conversion and certificate of incorporation required by Delaware should be filed with Delaware’s Secretary of State.
4. Delaware Corporate Formalities. Tasks normally associated with starting up a corporation will have to be completed such as drafting corporate bylaws, issuing stock certificates, etc., so that the now-Delaware corporation continues to have limited liability.
IMPORTANT: Federal and state taxes, as well as business arrangements such as contracts, leases, and insurance can be affected by an entity conversion, so please consult an attorney and tax professional to protect yourself from potential contract or tax issues.
Although this post lays out the basic outline of the steps required for conversion to a Delaware corporation, potential tax issues, especially if the company has any debt, can make the process much more complicated.
It is tempting to try and save money by completing relatively straight-forward processes like the conversion process on your own, there are drastic consequences if the process is completed incorrectly.
Please note that this article (1) is not provided in the course of and does not create or constitute an attorney-client relationship, (2) is not intended as a solicitation, (3) is not intended to convey or constitute legal advice, and (4) is not a substitute for obtaining legal advice from a qualified attorney.