Business Entity Conversions

When someone forms a business, they must consider the type of business entity to be formed and in what jurisdiction to form the entity. This initial decision can depend upon a number of business and economic factors, including taxes, potential personal liability of owners, administrative flexibility, and state and federal laws. Common business entity choices include corporations, limited liability companies, limited partnerships and general partnerships. But what happens if those circumstances change and the owners desire to change the form of their business entity? The answer under the California Corporations Code is that, under certain circumstances, a business entity may convert to a different form of entity and/or to an entity governed by a different jurisdiction.

Prior to 2023, a California corporation was only permitted to convert to another California business entity. However, as of January 1. 2023, California amended its corporate conversion statute (Corporations Code Section 1151 et seq.) to allow a California corporation to convert to a business entity in an out-of-state jurisdiction so long as the laws of that other jurisdiction permitted such a conversion. The Corporations Code had previously permitted limited liability companies (Corporations Code Section 17710.02), general partnerships (Corporations Code Section 16902), and limited partnerships (Corporations Code Section 15911.02) to convert to out-of-state entities. Thus, pre-2023, for a California corporation to change its jurisdiction of organization, it would first have had to convert to another California form of entity and then convert that entity to an out-of-state entity or to undertake a reincorporation merger by forming a shell corporation in the out-of-state jurisdiction and then merging the California corporation into that shell corporation.

While at first glance the new statute might be seen to reduce the barriers for companies to move out of California, the legislators sponsoring the new statute argued that, since the conversion process is already in place for other forms of business entities and is standard for corporations in other states, it would not encourage corporations to depart but instead would encourage more businesses to incorporate in California because new companies value flexibility. Further, corporations that wish to convert to an out-of-state entity can already do so by the more cumbersome two-step processes noted above. Moreover, many of these conversions to out-of-state entities only change the laws of corporate governance (for example, electing to be governed by Delaware corporate law for capital raising or financing purposes) and do not require the businesses to physically relocate.

If your business is considering a change of business entity or a change in governing jurisdiction, the attorneys at Poole Shaffery have the expertise and experience to guide you through the conversion process. We look forward to the opportunity to be of assistance to you.