Entity Conversion in Washington
In a previous post, we discussed how the entity conversion bill passed by the Washington State Legislature in 2014 allowed companies to complete a conversion (instead of going through a merger) to change a company’s entity structure. You can use a conversion to change your entity structure to a different form (i.e. from an LLC to a corporation) or change your domicile to a different state. We continue the discussion about conversion in this post by going into more detail about the steps to complete a conversion.
Washington law allows conversions between domestic limited liability companies (LLCs), corporations, and limited partnerships. Washington law also allows these domestic entities to convert to foreign entities (a foreign entity is an entity incorporated in a state other than Washington) and vice versa to change your domicile. If you want to change your company’s domicile, you’ll first need to look at the governing statutes of both states to make sure the conversion you’re seeking is permitted under those states’ laws. States have varying restrictions; for example, California does not allow a California corporation to convert to a foreign corporation.
In instances where conversion isn’t possible, you can do a merger to redomicle. Under this process, you would need to create a new entity in the state you would want to move to and merge your company into the new entity. This process can be more time-consuming and costly.
Company Approval for Entity Conversion
The converting company must approve a plan of conversion. The plan of conversion is a document that lays out the terms of the conversion and the rights and responsibilities of the members or shareholders after the conversion; it also includes the organizational documents of the converted entity.
In an LLC, the operating agreement should spell out the member approval required for a conversion. If the operating agreement is silent on conversion, then the default rule is that unanimous consent of the members is required. If the conversion is from a Washington LLC to a foreign entity or vice versa, you also need obtain the type of approval required by the foreign entity’s governing statutes.
If a Washington corporation is converting to another domestic entity, the company needs to obtain unanimous shareholder approval of the plan of conversion. If the Washington corporation is converting to a foreign corporation, the shareholder approval required is the same as for a merger, which is generally a majority or two-thirds approval (depending on what is required under the articles of incorporation and if there are any significant changes to shareholder rights after the conversion).
Also, if any shareholder or member will have personal liability as a result of the conversion, the shareholder or member must sign a written consent agreeing to be held personally liable after the conversion.
A conversion may also trigger dissenters’ rights. If the rights a shareholder is entitled to by ownership of shares after the conversion are not at least as favorable as the rights of the shares before the conversion, the shareholder may exercise their dissenters’ rights.
Documents Necessary for Entity Conversion
In addition to approving a plan of conversion, the company must file with the Secretary of State the Articles of Conversion, a conversion cover sheet, and, if the converted entity is a Washington entity, the new charter document of the converted entity (that is, Articles of Incorporation, Certificate of Formation, or Certificate of Limited Partnership). If the converted entity is a foreign entity, you’ll likely have to file similar charter documents under the laws of the other state. Also, depending on how much business you continue to do in the state you’re leaving, you may have to maintain a registered agent there.
The new converted entity is for all purposes the same entity that existed prior to the conversion, and it retains all rights, obligations, and liabilities of the old entity. Once the conversion is complete, you’ll also want to consider updating any contracts, title, and any other records to reflect the converted entity’s name.
If you would like to learn more about converting your entity, please contact us today.