Fact checked for accuracy by Billie Anne Grigg, a bookkeeper and Mastery Level Certified Profit First Professional.
Every entrepreneur’s business-related decision is crucial to their business’s overall security and well-being, affecting their standing in life, especially when they heavily rely on their business for a living.
If you are an entrepreneur, you must know that the entity any business operates under can make or break your company. However, change is constant, especially in the world of business, and there are times when your initial entity type of choice is no longer serving your business the way it should. So, if you believe it would be best to switch from one entity to another, you will need efficient statutory conversion.
What is a Statutory Conversion?
A statutory conversion is an important process of changing a type of business entity or moving the jurisdiction in which it is domiciled (the state where you formed your business) to a different entity type or state. However, it would be best to keep in mind that such conversions can lead to serious tax and statutory entanglements. So, it is imperative to seek expert advice from reputable tax and legal advisors before making any conversion.
A business entity conversion is a legal process of converting your current business entity into another business entity without forming a new entity or dissolving your current entity. Businesses usually change their legal structure for several reasons.
For instance, an LLC might want to convert to a corporation to give its loyal employees business shares they deserve while saving money on taxes and attracting venture capitalists that would be good for the business.
Other Methods to Convert a Business Entity
There are two other methods you can use to convert your business entity other than a statutory conversion. Below are some details on each one, but we recommend talking to a professional advisor to help you make the right decision for your business.
This method involves dissolving your business’ original entity for you to form a new one. Among the different methods of such conversion, it is undeniably the most complex and expensive approach to change entity forms.
Dissolving and liquidating a business entity can be difficult as it requires a new entity to be established. In addition, you would need to enter new arrangements to transfer both the assets and liabilities of the original entity to the new one.
This method involves forming a new entity type and consolidating the former entity type into the new one.
One advantage of this approach over the dissolution/formation is that as a focus of statute, the former entity will discontinue existing, its assets and liabilities will bestow in the brand-new entity, and its proprietors will become proprietors of the new entity.
Why a Statutory Conversion Is Better For Most Businesses
You do not need to form a new entity with a statutory conversion as your business’s subsisting post-conversion is equally recognized as it was pre-conversion.
The only difference is that you would administer your business in a different form of entity. Like the inter-entity merger approach, the assets and liabilities are assigned by law. This approach is by far the least complicated and cost-efficient way to change any business entity form.
How Do You Do a Statutory Conversion?
While the necessary steps will be based upon the state statutes governing both the pre-conversion entity type and the post-conversion entity type, these statutes usually vary by state. However, generally, here are the six basic steps you would need to follow for a successful conversion.
1. Review the governing statutes to be sure they allow authorized conversions. Such conversions are a reasonably contemporary innovation, and not every business entity statute approves of them.
2. Make a blueprint of a plan conversion that contains the important terms and conditions of the whole transaction.
3. Make sure the owners support the plan.
4. Draft a compilation record for the post-conversion entity type such as business articles or an LLC document of organization.
5. Obtain and complete the relevant certificate of conversion. Depending on the state, the certificate of conversion might have a different title. For instance, it might be called either a statement of conversion or articles of conversion.
6. Present the certificate of conversion with the appropriate formation document and its necessary fee to the state filing office.
The technicalities around statutory conversions might appear too complicated for you. A responsible entrepreneur should allow educated professionals to help you make significant business decisions. That way, you can avoid avoidable potential legal obstacles that might harm your business.
Can I Hire Someone To Convert My Business Entity For Me?
The short answer to this question is yes. So, because a statutory conversion is a serious matter which can significantly affect your business’ professional standing and overall well-being, you must make sure the right company with reputable professionals helps you with the necessary transactions needed for a conversion.
Make sure you have licensed CPAs and reputable business lawyers on your side to properly assist you with your conversion journey so you can meet all the requirements for a successful statutory conversion.
As a business owner, you would want to consider the rules and regulations of the Internal Revenue Service or IRS as it is responsible for the collection of taxes and enforcement of tax laws. The serious topic of such a conversion is fundamentally an issue of tax classification. Generally, you will need to have a new Federal Employer Identification Number or EIN for your business, especially when your ownership or entity has changed.
So, with professional advice from the experts, you could successfully change your business entity from an LLC to a corporation. The converting entity in this example is the LLC, as it is the entity present before a conversion takes place. The converted entity would be the corporation or the entity resulting from a successful conversion.
Ultimately, the process of converting your company entity might be straightforward. However, a simple filing with the Secretary of State might not be recognized by different states.
Do you plan to convert your business entity because you plan to transfer your business from one state to another? Getting yourself a company that knows the ins and outs of the field allows you to have one less problem. That way, you can focus on the things that require more of your precious time and energy.
The Last Word
As your business expands and grows, so should your mindset and strategies. When an entity type of choice no longer serves your company, switching from one entity type to another would be best, then efficient statutory conversion would be best. However, seeking professional advice from reputable tax and legal advisors would be necessary before making any conversion, as such decisions can make or break your business.
Filed under: Advice Columns