What’s the difference between converting or merging a non-corporation to a corporation?

Sometimes owners of a company that is not a corporation may want to convert it into a corporation to prepare for future investment opportunities. However, some states do not provide for statutory conversions. In those cases, a merger is the proper method.

What is a statutory conversion?

Statutory conversion is the process through which one entity type can convert into a new entity type, for example, an LLC converting into a corporation. Generally, the owners of the current company will agree to and approve the conversion and draft a conversion plan. Then, the certificate of conversion must be drafted and filed with the Secretary of State. Afterward, or concurrently, the formation documents for the new entity need to be drafted, such as the certificate of incorporation and bylaws if converting to a corporation.

Businesses thinking about this option may want to consider doing so after the start of a new year because of the potential headaches associated with filing taxes for only part of a year.

What is a statutory merger?

Instead of converting the existing company into a new entity type, a merger requires the creation of an entirely new entity. This means doing a normal formation in the specific jurisdiction the new entity is being formed in. The time it will take for the new entity to be formed can vary drastically state by state, though most states offer expedited processing at an additional charge.

The existing and the new entity (who should be controlled by the same parties) then vote to approve a merger between the two entities in which the new entity “survives” and the former structure goes away. A merger also requires the drafting and filing of a certificate or article of merger with the Secretary of State.

Why do a conversion instead of a merger?

A merger requires the creation of a brand new entity and then a merger with the existing entity, which is more complex, time-consuming, and can be more expensive than simply converting the existing entity into a new entity type. Also, a merger can implicate non-assignment or change-of-control provisions in any agreements that the current entity is bound by. 

Since conversions are not available in every state, sometimes a merger is the only path to accomplish the company’s goals.

Laura Yanka

Laura's practice focuses on independent developers and startups. She endeavors to make every client feel welcome, important, heard, and respected.

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