By Doug Bend, founder of Bend Law Group, PCa law firm focused on small businesses and startups.
Most startup founders form a Delaware C corporation as it is the preferred legal entity of most investors. However, some founders form a California LLC instead when they expect to have losses for the first few years and want those losses to flow to Schedule C of their individual tax returns to offset other income.
Once the company has gained traction and is ready to raise outside venture capital funding, the founder can then convert the LLC into a Delaware corporation by completing the following 10 steps:
1. Member Approval
A conversion plan must be approved by the members of the converting LLC.
2. Submissions to the Secretary of State for California and Delaware
Separate conversion requests are required in both California and Delaware. In addition, a Certificate of Incorporation must be filed in Delaware.
3. Internal documents
After the conversion requests have been approved, you must prepare all of the company’s internal documents, such as the Articles of Association, share purchase agreements, indemnity agreements, and initial Board approval.
4. City Registration Certificate for Business
In addition to the internal documents, you must update the city business license to include the entity’s new legal name.
5. Statement of fictitious company name
If you are going to do business under a name other than the full legal name of the company, you must submit a new fictitious business name statement to the city clerk.
6. Publication of the fictitious company name statement
Once you get the approved fictitious business name back from the municipal office, you must have it published in a legally approved newspaper.
7. California Employment Development Department
If your company performs payroll for employees, you must update the Entity Conversion Employment Development Department (EDD).
8. Seller’s License
If your company collects sales tax, you must update the company’s account with the California Department of Tax and Fee Administration. If you have any problems, call the department at 1-800-400-7115 and they will walk you through the process.
You must work with your CPA to update the IRS on the conversion. The good news is that your entity must retain its Federal Employer Identification Number (EIN).
Finally, you need to update the company’s vendors about the entity conversion. For example, you must update the company’s bank account and insurance policies to include the company’s new legal name.
You should consult with your attorney, as your company may have different requirements and with your CPA to ensure you understand the tax implications of converting your California LLC to a Delaware corporation, but this checklist is a good starting point for prepare a game plan for the conversion. As you can see, several government agencies and vendors need to be updated, so you need to make sure that the benefits of making the conversion outweigh the time and cost.
The information provided herein is not legal advice and is not intended to be a substitute for advice from legal counsel on any particular matter. For legal advice, you should consult a lawyer related to your specific situation.