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Practical Considerations for Effecting a Timely Merger or Conversion

By: Colleen A. DeVries, COGENCY GLOBAL on Mon, Apr 16, 2012


There are many reasons why the shareholders or members of a business entity might want to merge or convert to a different entity type or change their state of domicile. While this article will provide general information on matters considered when the owners of a business entity make these kinds of decisions, the primary focus will be on the practical administrative tasks and challenges related to filing the necessary certificates with the Secretaries of State to update the public record with the successor merged or converted entity.

Before detailing these practical considerations, following are some examples of why a company may want to consider changing its form and/or jurisdiction of organization[1]:

General Partnership or Limited Partnership: Merger or Conversion to Corporation or Limited Liability Company (“LLC”)
Partners of a General Partnership or Limited Partnership experiencing significant growth may want to seek increased limited liability protection by changing the entity type. In a General Partnership all partners have personal liability exposure for the debts, liabilities and obligations of the partnership. In a Limited Partnership, while the Limited Partners (a/k/a, the owners of the Limited Partnership) benefit from limited liability protection up to the amount of their investment in the Limited Partnership, the General Partners, who are responsible for running the business of the Limited Partnership, do not have that protection and are exposed to personal liability.

The corporate or LLC structure offers additional protection by limiting the shareholders’ or members’ liability to the amount of their investment with the directors, officers and managers not being liable for the debts and other obligations of the corporation or LLC.

Corporation Merger Into/Conversion to LLC
In the past decade, Secretary of State records have indicated that formation of LLCs has surpassed the number of corporations formed. In the last Annual Report published by the Delaware Division of Corporations, 71% of new entity formations were LLCs vs. 22% as corporations. The pass through tax benefits, flexibility in management of the LLC structure and limited liability benefits afford a company the key benefits of both a corporation and partnership in the LLC structure. In addition, there is a significant increase in the comfort level of the use of the LLC structure in all types of financial transactions by banks and licensing authorities, which has contributed to the increase in new formations, mergers and conversions using the LLC form.

LLC Merger Into/Conversion to Corporation and Change of Domicile
Members of a limited liability company may want to change entity type and domicile in order to interest new investors. For example, a California LLC may want become a Delaware corporation because investors are more comfortable investing in a Delaware corporation to have access to Delaware’s Chancery Court and years of established precedents. In this example, the change in entity type and domestic state of formation can be effected by either merger or conversion.

How to Change Entity Type or Domicile
Once you have agreement and a plan for merger or conversion, along with any other statutorily required documentation, a simple submission of a Certificate of Merger or Conversion in the relevant domestic state or states will effect the change of entity type and/or jurisdiction of formation. This part of the process is fairly simple.

The challenging part is coordinating the timing and paperwork required in each of the other states the merging or converting entity is doing business in at the Secretary of State level, if qualified, and updating any other public record filings, i.e., business licenses on record with any state, county or local authority.

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[1] Examples included in this article are for illustrative purposes and do not address all of the business and legal considerations that should be addressed when making a decision on merging or converting your business entity.

This article is provided for informational purposes only and should not be considered, or relied upon, as legal advice.