According to the “Corporate Entity Cheatsheet” I posted last week, there are clear reasons to form each type of corporate entity. For LLCs, it was the recognition that you weren’t looking for any expansion or investment opportunities, as the inability to issue stock would be unattractive to both potential employees and investors.
However, circumstances change. In the event that you are suddenly looking to expand, realize an untapped market segment, or want to fundraise, your LLC will be an extremely unattractive proposition for most interested parties. Many investors may require you to convert your entity to a corporation as a condition of investing in you.
Fortunately, this conversion process is relatively straightforward, and is even defined in the California Corporation Code.
- The members of the LLC must agree to adopt a plan of conversion. This plan details all the substantive changes and transfers involved in converting the LLC’s operating agreement into the new corporation’s Articles of Incorporation. Notably, you must specify how the concept of LLC ownership transfers into numbers of shares.
- File the Articles of Incorporation with the Secretary of State. This must incude a statement of conversion which contains details about the old LLC and the new entity.
- Draft and file corporate bylaws.
- File S-corp election if applicable.
- Elect officers and directors, and approve them with initial Board of Directors and shareholders meetings.