Statutory Conversions: How to Change Business Entity Type
So you formed your limited partnership or close corporation and your business has flourished. You have employees, an established customer base, perhaps even room to franchise out. But your current business entity is limited and inefficient for business expansion. Perhaps you would benefit from a different tax structure or more legal protection. Or maybe you have found that a partnership would be more beneficial given the realities of your business. How do you go about changing your business entity from one type to another? Do you need to form an entirely new company? Read on to learn about changing your business entity type after formation, and speak with a seasoned Houston business law attorney if you need help with a Texas business law matter.
Starting a New Entity
Historically, when a business owner wanted to convert to a new type of entity, they would simply close the existing entity and open a new one. The process for doing so is now much more complicated. There are legal, administrative, and tax implications, as well as complex issues involved with distributing the assets legally and soundly. This is no longer the preferred method.
A slightly better approach would be to start a new entity (either in the same state or in the new, desired state) and merge the existing business into the new entity. Merging transfers all assets by operation of law into the new entity. It is marginally less complicated than closing a business and transferring all assets to a new business, but it is still more complicated than necessary. In Texas, you can instead convert your existing entity into a new entity type, otherwise preserving the same business’s existence.
The Conversion Process
Converting a business into a new entity type is a much simpler way to deal with changing a business’s type. The process became available over the last couple of decades due to changes in state corporate law. Statutory conversion can involve changing from one entity type to another or even changing a corporation’s jurisdiction from one state to another.
Conversions will generally involve the following steps:
- Prepare a Plan of Conversion
- Secure appropriate approvals from the governing body (resolutions, shareholder approvals, corporate directors, etc.)
- File the appropriate Certificate of Conversion (depending on original and new type of entity) with the Secretary of State
- File the appropriate Certificate of Formation (articles of organization, certificate of incorporation, etc.) with the Secretary of State
The Plan of Conversion is a relatively simple document that states the base elements of the conversion: name of the original entity; name of the new entity; a statement that the entity will continue and will now become a new entity type; and the Certificate of Formation. The Texas Secretary of State provides a sample Plan of Conversion.
The process is slightly different depending on what type of entity you are coming from, and which you are converting to. Different forms will be required. Texas has specific forms for converting LLCs to corporations, corporations to LPs, corporations to LLCs, etc. A seasoned Texas business attorney can walk you through the process and ensure you generate and file all appropriate forms.
If you need legal assistance with a Texas business law matter, contact the seasoned and experienced Texas business lawyer Leigh Meineke at the Houston offices of Stephens | Domnitz | Meineke PLLC by calling 832-706-0244.