Converting a Business

(You may also want to read our related post, “How Do I Convert a Partnership, LLC or Other Business Entity into a Corporation?“)

The New York Limited Liability Company Laws and the Delaware Limited Liability Act have provisions to easily convert an existing general partnership or limited partnership (and with respect to Delaware, “other entities” as well, like trusts or other unincorporated business entities) into a Limited Liability Company.  Perhaps the owners want to convert the original entity into an LLC for tax reasons (like passing through the LLC’s losses to the owners’ tax returns) or perhaps the startup company/partnership is seeking venture capital financing and the venture capital investors don’t want to invest in a partnership.  Consequently, the business needs to convert to a limited liability company.  How is a conversion of a partnership,  corporation or other entity into an LLC accomplished?

Under Delaware Limited Liability Act Section 18-214 et seq., “Any other entity may convert to a domestic limited liability company” by complying with certain procedures.  Under the Delaware Limited Liability Act, the term “other entity” means “a corporation, a statutory trust, a business trust, an association, a real estate investment trust, a common-law trust or any other unincorporated business or entity, including a partnership (whether general (including a limited liability partnership) or limited (including a limited liability limited partnership)) or a foreign limited liability company.”  This provision allows for a conversion of a Delaware partnership, trust or foreign limited liability company (an LLC formed under any other States’ laws) into a Delaware limited liability company.  If all of the procedures are followed, you will end up with an LLC where you used to have an “other entity” and the conversion will not “affect any obligations or liabilities of the other entity incurred prior to its conversion to a domestic limited liability company or the personal liability of any person incurred prior to such conversion.”

If you have a general partnership or limited partnership formed under the laws of New York, look in Section 1006 et seq. of the New York Limited Liability Company Law.  Under these provisions, a New York general partnership or limited partnership can be converted to an LLC.  Again, if all of the procedures are followed, you will end up with a LLC where you used to have a general partnership or limited partnership, and under Section 1007 et seq. of the New York Limited Liability Company Law, “a partnership or limited partnership that has been converted pursuant to this chapter is for all purposes the same entity that existed before the conversion” (e.g., all property, debts, and actions or proceedings of the partnership will be same of the resulting LLC).

If you are considering a conversion of a general partnership or limited partnership (or “other entity” in Delaware) into a limited liability company, make sure to check with your accountant and/or tax adviser and a New York Business Lawyer (or corporate attorney).  There may be important tax and other legal consequences to consider before the conversion of a corporation, partnership or other entity to an LLC.