You’ve decided to convert your Washington LLC to a Washington corporation. If you’re a startup, you’re probably doing this because you want to (1) attract institutional investors (who typically won’t invest in LLCs) and/or (2) compensate key hires with equity (which is much easier to do using corporate stock).
Whatever your reasons for converting, you’ve picked a good time to do it. Up until recently, if a Washington LLC wanted to become a corporation, the only option was to participate in a merger. In contrast to a conversion, a merger is complicated, time-consuming, and expensive—sometimes prohibitively so for small businesses.
Fortunately, in 2014, the Washington legislature amended the LLC Act and the Business Corporation Act to allow entities to convert, rather than merge. This streamlines the process of changing entities considerably; however, there are still a series of steps you need to follow.
Let’s dive right in.
First, You Need A Plan
The starting point is to create a plan of conversion.
The plan must contain certain information about the entity, the conversion, and organizational documents. The Washington LLC Act sets out the particulars of what must be in a plan, so you should certainly consult it if you’re converting without the help of an attorney.
Next, Get The Plan Approved
Once you have the plan of conversion in place, it’s time to get it approved internally.
Your LLC operating agreement should spell out the member approval required for a conversion. But if it doesn’t, or if you don’t have an operating agreement, then there must be unanimous consent by the members of the LLC to convert.
I should pause here to emphasize the importance of having an LLC operating agreement. Let’s say you’re a founder who formed an LLC fully expecting to convert to a corporation in six months. At the time, you may have blown off preparing an operating agreement because you didn’t want to bother with a lawyer yet. But by now you’ve given out interests in the LLC to others and they don’t want to convert. If you’d adopted an operating agreement from the start, you could’ve varied the unanimity requirement to convert, but now you’re being held up by others.
OK, hopefully you won’t have to twist any arms to approve the plan of conversion, but you should make sure that all the LLC members formally approve the plan before the next step—filing the articles of conversion.
Finally, File The Articles
Once the plan of conversion has been approved, it’s time to file articles of conversion with the secretary of state. The articles of conversion must include certain information about the entity and the conversion. The Washington LLC Act sets out the particulars of what must be in the articles of conversion, so you should certainly consult it if you’re converting without the help of an attorney.
Also, be sure to include a conversion cover sheet with the articles of conversion to streamline the process.
At the time you file the articles of conversion, you should also file articles of incorporation. At this point, the process becomes just like if you were an individual starting a new corporation. So, you should also prepare corporate bylaws, shareholders agreements, and other organizational documents. These tasks are best done with the help of a lawyer.
Here are a few answers to common questions relating to entity conversion.
Do I Need To Dissolve The LLC?
No. After you’ve converted your LLC to a corporation, there’s no need to “dissolve” or otherwise wind up the LLC. This is because the previous LLC is subsumed within the new corporation. So, all the assets and liabilities of the LLC remain vested in the corporation.
Can I Convert Other Types Of Entities?
Yes. This isn’t limited to LLC -> Corporation. LLCs, corporations, and limited partnerships are all types of Washington entities that may be converted.
Can I Convert Entities From/To Other States?
It’s also possible to convert entities from other states into Washington entities and vice versa, though it’s important to ensure that the other state’s laws authorize such conversion before attempting to do so.
If you have more questions, you can leave a comment below or reach out directly.