Converting a Delaware Limited Liability Company (LLC) to a Corporation
In Delaware, as elsewhere, the two most common business entities are the limited liability company (LLC) and the corporation. Although there are benefits and drawbacks to both types of business entities, those who seek investors are better off organizing as a corporation. If the business is already organized as an LLC, Delaware law allows converting the LLC into a corporation.
Advantages of an LLC
The LLC has a number of advantages over the corporation and some drawbacks.
These advantages include:
· There is less paperwork involved than with a corporation.
· Delaware law allows more flexibility to how an LLC is run, as opposed to a corporation. An LLC is run by one or more owners (called “members”) or by one or more managers. There is no requirement to have a board of directors or certain officers.
· Taxation is pass-through. In other words, the LLC is ignored for tax purposes. Profits and losses pass through to the owners and are reported on their individual tax returns. In comparison, a corporation pays taxes at the corporate level plus shareholders pay tax on dividends.
Converting to a Delaware Corporation?
There are several reason why converting to a corporation might be the better entity format for you. Some of them are:
· LLCs are rather new as a business entity choice. Corporations have been around for centuries. Accordingly, there is a lot more law on how corporations must be run.
· The Delaware corporation is the gold standard. Delaware has longstanding and well-developed corporate law. It even has a special court, the Court of Chancery, dedicated to resolving business disputes.
· Investors love certainty and prefer the Delaware C-Corp. If there are more rules governing how a corporation must be run, then there are more protections for investors. Corporations must have boards of directors and officers. By statute and case law, board members and officers have specific duties to the corporation and to the shareholders.
LLC or Corporation?
The bottom line is that If you are just starting out in your business, or it is just you and a few friends or family members, the Delaware LLC is probably the better entity to choose. But, click here to see our article about issues related to equity compensation awards in an LLC. But if you are seeking outside investors, or expect to someday, a Delaware corporation is the better choice because that is what investors expect and there is, overall, more certainty concerning the treatment of Delaware corporations from both a corporate governance and taxation perspective. You should consider converting if you already have an LLC.
Converting from a Delaware LLC
If your business is already organized as a Delaware LLC, and you would rather do business as a Delaware corporation, you need not fold your LLC and then incorporate your business as a new corporation. Instead, you can convert your LLC. Converting your LLC requires these steps:
· Prepare a resolution for the members of the LLC to sign agreeing to converting the LLC into a corporation.
· Draft a Certificate of Conversion, which sets out the date the LLC was formed, its name, what the corporation’s name will be, etc.
· Prepare a Certificate of Incorporation for the corporation that the LLC will become. This document names the corporation, names the registered agent, states the corporation’s purpose, identifies the number of authorized shares of stock and their par value, and names the incorporator.
· File the two Certificates with the Delaware Secretary of State and pay the filing fee.
· Once the filings are approved, finish organizing the corporation as usual, with organizational consents or resolutions, bylaws and perhaps a shareholders agreement.
How Long Will Converting Take?
For a long time, Delaware accepted filings only in person, by fax or by mail. It took two to three weeks for a filing to be approved unless you paid for expedited service. As of January 1, 2020, Delaware will no longer accept fax filings but has instituted a new document upload service. Perhaps the filing turnaround will be quicker now.
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