Let’s say you started your business a few years ago and operated as a sole proprietorship until you realized that you wanted to limit your personal liability in case someone sued your business. So, you took some practical advice and formed a single-member limited liability company (LLC). Before long, you decide you want to scale operations and are comfortable with the idea of getting some institutional funding from private equity partners or venture capital firms.
In such instances, it’s very likely that you’ll need to convert your LLC into a corporation (the reason is due to how taxes for both the LLC and the institution investor work). Fortunately, this process is not as complex as it once was thanks to a process referred to in Colorado as “statutory conversion.”
Many states now have this streamlined process for entrepreneurs to incorporate their existing companies into a C corporation:
• Step 1 in statutory conversion is to make sure all LLC members or business partners agree to convert the business structure.
• After your company’s stakeholders agree on the conversion plan, you need to file the certificate of conversion with the Colorado Secretary of State’s office.
• Convert your ownership interests (LLC or partnership shares) for interests into shares in the newly formed corporation.
• Tie up loose ends like adopting bylaws, issuing stock, entering into a shareholder agreement, and other actions specific to your business situation.
If you are not using statutory conversion to convert your current business entity into a corporation, the process becomes more complicated. In this situation, you will likely have to form a new corporation (which involves filing articles of incorporation) and dissolve your current entity. To transfer the assets into the newly formed corporation, you must generally receive the assets personally and then place them into the corporation.
There are also a number of tax considerations to consider when changing from an LLC that was taxed as either a disregarded entity or a partnership to a “C corporation”. Our firm always encourages that the Company’s CPA be a part of the plan and decision on whether or not to convert into a C corporation, as the two tax regimes are quite different from each other.
This blog is meant to serve as a general introduction to converting existing businesses to corporations for those considering making the change. Every situation is different; to ensure you meet your objectives and have an efficient conversion process, retain a knowledgeable and experienced firm like Doida Law Group. We offer flat-fee billing structures to meet clients where they are financially. Reach out to us soon to discuss your options.