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Entity Formation (Part 3 of 3): Converting from a Michigan LLC to a Delaware C-Corporation

Startups seeking outside investors will often need to convert form an LLC to a Delaware C-corp.

Startups seeking outside investors will often need to convert form an LLC to a Delaware C-corp.

Many start-ups decide to set up their company as an LLC because it can be easy and inexpensive.  However, if the start-up wishes to pursue venture capital, it will need to adopt the Delaware C-corporation form.  For this reason, many Michigan LLC’s need to convert to a Delaware C-corporation at some point in their life. Here are the basics of how this is done.

1.         Adopt a Plan of Conversion  

A plan of conversion establishes how LLC membership interests will convert to corporate common stock.

A plan of conversion establishes how LLC membership interests will convert to corporate common stock.

First, the LLC will have to adopt a plan of conversion, which includes things like the type of business you are converting to, the terms and conditions of the conversion, and how you will convert the membership units into corporate shares.  The members of the LLC are entitled to vote and approve the plan of conversion. By default, the Michigan statute for converting LLCs requires unanimous consent by the members of the LLC entitled to vote.  MCL 450.4708(c). However, the statute also permits the LLC’s operating agreement to allow for different voting rules. If any of the members of the LLC do not wish to convert, they can dissent from the conversion and are entitled to receive payment for the fair market value of their interest. MCL 450.4708(c).  Because the consent of members is required, it is important to have proper documentation in place (typically in the form of an operating agreement) clarifying: (i) who are the members of the LLC; and (ii) the vote required to convert the corporate form.

2.         Prepare and File Michigan and Delaware Certificates of Conversion and a Delaware Certificate of Incorporation.

Once the company is ready to move forward with the conversion, it will need to file the Certificate of Conversion in Michigan ($35) as well as in Delaware ($164+).  The state of Michigan will require that all annual statements that are due be submitted with the Certificate of Conversion.  Along with the Delaware Certificate of Conversion, the company will also file a certificate of incorporation with Delaware ($89+).  The certificate of incorporation contains basic information about the company, the shares it is authorized to issue, their par value, and other optional provisions. Del. C. §102.

Because the company will not likely have a physical presence in Delaware, it will need to establish a registered agent in Delaware that will accept service documents on the company’s behalf.  There are businesses that can be hired for about $99/year, and you can find a list of agents here.  You need to find a registered agent before you incorporate, as you must list the registered agent’s information in your Certificate of Incorporation.

Once you are incorporated, you need to follow the corporate formalities, which typically include preparing and executing a First Action of the Incorporator, a Board Consent in Lieu of the Initial Meeting, a Stockholder Consent in Lieu of the Initial Meeting, and Corporate Bylaws.  A startup should also ensure that appropriate vesting arrangements are in place covering issued stock.

3.         If Necessary, Register with Michigan as a Foreign Corporation

If the company is continuing to conduct business in Michigan, the company will need to apply for a Certificate of Authority to Transact Business in Michigan ($60) once it has been incorporated in Delaware.  In order to apply for a Certificate of Authority, the company will have to obtain a certificate setting forth that the corporation is in good standing under the laws and jurisdiction of Delaware (“Certificate of Good Standing”) ($50).  You can obtain this certificate at the same time you incorporate in Delaware.  The application for the Certificate of Authority requires information about where you are incorporated, what the specific business or affairs being carried on in Michigan, and the total authorized shares of the corporation.  Much of this information will already be in your Certificate of Incorporation.

It is recommended that for both the conversion process, as well as the incorporation process, you should get assistance from an

See Part 1: When Should You Form an Entity for Your Business

See Part 2: Selecting the Form of Entity

 

One Response to Entity Formation (Part 3 of 3): Converting from a Michigan LLC to a Delaware C-Corporation

  1. Pingback: Entity Formation (Part 2 of 3): Selecting the Form of Entity | Wolverine Startup Law

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