By Doug Bend, founder of Bend Law Group, PC, a 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 instead form a California LLC when they expect to have losses their first few years and would like for those losses to flow down to schedule C of their individual tax return to offset other income.
Once the company has gained traction and is ready to raise outside venture capital financing, the founder might then convert the LLC to a Delaware corporation by completing the following 10 steps:
1. Member Approval
A plan of conversion will need to be approved by the members of the converting LLC.
2. Filings with California and Delaware Secretary of State’s Office
Separate conversion filings will be required in both California and Delaware. In addition, a Certificate of Incorporation must be filed in Delaware.
3. Internal Documents
Once the conversion filings have been approved, you will need to prepare all of the internal documents for the corporation such as the bylaws, stock purchase agreements, indemnification agreements and the initial Board consent.
4. City Business Registration Certificate
In addition to the internal documents, you will need to update the city business license to include the new legal name of the entity.
5. Fictitious Business Name Statement
If will be conducting business under a name other than the full legal name of the corporation, you will need to file a new Fictitious Business Name Statement with the county clerk’s office.
6. Publication of the Fictitious Business Name Statement
Once you get the endorsed Fictitious Business Name back from the county clerk’s office, you will need to have it published in a legally adjudicated newspaper.
7. California Employment Development Department
If your company is running payroll for employees, you will need to update the Employment Development Department (EDD) of the entity conversion.
8. Seller’s Permit
If your company collects sales tax, you will need to update the company’s account with the California Department of Tax and Fee Administration. If you have any trouble, you can call the Department at 1-800-400-7115 and they will walk you through the process.
You will need to work with your CPA to update the IRS on the conversion. The good news is your entity should keep its Federal Employer Identification Number (EIN).
Lastly, you will need to update the company’s vendors on the entity conversion. For example, you will need to update the company’s bank account and insurance policies to include the new legal name of the corporation.
You should consult with your attorney as your company might have different requirements and with your CPA to make sure that you understand the tax ramifications of converting your California LLC to a Delaware corporation, but this checklist is a good starting point for putting together a game plan for the conversion. As you can see, several government agencies and vendors would need to be updated, so you should make sure that the benefits of making the conversion will outweigh the time and costs.
The information provided here is not legal advice and does not purport to be a substitute for advice of counsel on any specific matter. For legal advice, you should consult with an attorney concerning your specific situation.