Converting an LLC to Delaware C-corp

KELLEN POWELL , HEAD OF CUSTOMER SUCCESS , GUST INC.

15 Apr 2022

Should I convert my LLC to a Delaware C-corp?

Maybe you formed your company in your home state initially for cost reasons or because it seemed like the simplest path to formation. Maybe you formed as an LLC instead of a Corporation so you could enjoy the tax advantages of a pass-through entity. These are completely practical and useful business formations, but now you need to raise money from investors, and you’ve found that your existing entity just isn’t going to work. The institutional investors you’re talking to are all insisting on a Delaware C Corporation.

If your company does not have significant assets (think equipment, trademarks, patents, cash, customers, codebases) that need to be transferred, or contracts that you don’t want to risk voiding, the cheapest and easiest path forward will be to dissolve your existing entity and start fresh with a newly formed Delaware corporation. For many early-stage companies that are pre-revenue and pre-seed this is the most cost effective and straightforward approach. If that sounds like you, you can get started creating your C Corporation today. We can also help connect you with our filing partners or someone in our legal network to help you dissolve the previous entity.

I Need To Convert My Entity

But let’s say you’ve looked into it, and dissolving your current entity just isn’t going to work for your circumstances. You could have favorable contracts in place with ‘Entity A’ that you do not want to renegotiate for ‘Entity B’. Maybe it’s just going to be too complicated or expensive to transfer the company’s existing assets through multiple stakeholders and into a new company.

In these cases it can be preferable to maintain continuity between your current formation and your new Delaware C Corporation… Until not long ago, this would have required creating a specially formed company to absorb the other in what’s called a ‘Statutory Merger.’ A process that requires state filings at multiple junctures and for owners to voluntarily exchange their ownership stakes after the creation of a new entity. It is a long, cost intensive and logistically complex process.

What Is A Statutory Conversion?

This is where a ‘Statutory Conversion’ comes into play. Statutory Conversion is a relatively new business process for changing one entity type to another. Since you are not ending one business formation and creating another, it will not end any contracts you have negotiated under the initial formation. You also won’t need to redistribute the company’s property; everything owned by ‘Entity A’ will continue to be owned by ‘Entity B’ with ownership stakes converting in accordance with your ‘Plan of Conversion’.

Statutory conversion is a relatively new process that not all states support yet. Delaware helpfully does support it, but if the state you initially incorporated doesn’t – you’ll have to choose from more cumbersome legal options. So before embarking on this process, the first step is to make sure that your state actually allows you to.

Most states do support it; every state has its own subtle differences for the process. To be clear, this blog is attempting to create a high level picture of those processes, but nothing within it should be construed as legal advice or specific instruction. Your mileage will vary depending on your state and company specifics, and the best way to avoid a legal fiasco or any unexpected surprises is to work with a lawyer on this process. If you don’t have a legal team, talk to us and we can help you find a legal partner from our Legal Partner Network.

How To Setup The Plan of Conversion (from a LLC to C-corp)

If you’ve made it this far, the first thing you’ll do to actually kick off the process is to make sure everyone who has an ownership stake is in agreement with the conversion. If they are you can get started preparing your “Plan of Conversion.”

A plan of conversion is a statement or agreement detailing the type of company being converted as well as describing the target entity. It generally needs to contain:

1. Converting entity name and state (i.e. Your Company, LLC, a Florida LLC), mailing address included
2. Converted entity name and state (i.e. Your Company, Inc, a Delaware C-corp) mailing address included
3. Authorization of all filings required in origin state and Delaware (Gust will provide samples for all your Delaware filings)
4. Amount of authorized shares and par value (10M at $0.00001 when using Gust Launch)
5. Itemization of assets being transferred (i.e. cash in bank, equipment, software, intellectual property)
6. Itemization of debts being transferred
7. Reference to the Delaware statute on conversions
8. Reference to the local statute on conversions
9. The proposed Certificate of Incorporation
10. The Proposed Bylaws
11. The Proposed Stockholder Agreement
12. Breakdown of how ownership units will convert to common stock
13. The proposed Officers of the converted entity (CEO/President, Treasurer & Secretary)
14. The proposed board members of the converted entity
15. Sign off from all owners of the converting entity

Once you have it written up, and everyone has signed, you’ll put it somewhere safe, keep it there, and hopefully never have to look at it again. You don’t typically need to share your plan of conversion with the state unless they ask to see it, but you will need to indicate that it was written and agreed to by all stakeholders when you file your Certificate of Conversion.

You’ll Need To Setup A Certificates of Conversion

The Certificate of Conversion is what actually gets filed with the state. States that support it usually provide free templates for a conversion on their Secretary of State website. You’ll be looking for something called something like a “Certificate of Conversion to a Foreign Business Entity.” Google is your friend when looking for these templates, as the Secretary of State web portals can sometimes bury things or be hard to navigate.

Once you’ve located your state’s template, follow the instructions, taking extra care to ensure it’s for the correct business type. Your state may have multiple versions of the form for different conversion and entity types.

You will most likely find when you read the instructions on the template that you also need to obtain a statement of good standing and/or pay off any taxes for your converting entity. In some states this is a single filing, in others you may need to request to pay your taxes off before separately requesting proof of good standing.

You’ll also need to file a separate Certificate of Conversion in Delaware. If you’re using Gust Launch, you won’t be able to prepare or file this CoC yourself. Gust’s filing partners will need to prepare and file it for you at your expense ($450) in order to file it alongside the Certificate of Incorporation that Gust Launch provides.

I Am Ready to Convert My LLC

Once you’ve successfully drafted your plan of conversion, had it signed by all stakeholders, and you’ve prepared everything you need to file in your home state for the conversion – you’re just about ready to go!

At this point, if you’re using Gust – you’ll want to connect with us so we can coordinate filings. We like to submit your Delaware filing the same day you postmark the filing for your outgoing state to minimize any gaps or ambiguity around your company’s governance.

Document Checklist

• Plan of Conversion
• Corporate Document Templates
• Certificate of Incorporation
• Corporate Bylaws
• Stockholder Agreement
• Certificate of Conversion for home state
• Certificate of Good Standing
• Certificate of Incorporation (Gust)
• Certificate of Conversion for Delaware (Gust)

Once you’ve got the new company formed, you’ll want to work with a legal team or an accountant to tie off any loose ends. If you have an LLC, you’ll probably want to file a federal return within 3 months of its dissolution. Otherwise, you could incur some penalties on your next return.

As well, if you’re LLC had any debts that get transferred to the C Corporation that could be considered an income event for everyone in the LLC and it may need to be taxed like income. It’s a good idea to keep your accountant in the loop throughout this process to advise you on any tax liabilities.

That’s it!

If you think a conversion makes sense for your business, and you plan to raise money from institutional investors, reach out via chat bubble or email support@gust.com! We’ll help you understand and streamline the process of conversion and connect you with our network of legal and tax professionals to help support the process.

The information provided by this post does not, and is not intended to provide legal advice; all information, content, and materials available on this post are for general informational purposes only. Please continue to do your own research when figuring out what is the best course of action for your situation (and it is recommended to seek the help of a professional startup lawyer when in doubt). Information on this website may also not constitute the most up-to-date legal or other information.

Gust Launch can set your startup right so its investment ready.

SETUP RIGHT