Conversion From an LLC to a C Corp: Don’t Fear the Paperwork!
Converting from a Michigan LLC to a Delaware C Corp is a common move for startups. Startups might initially organize as an LLC in their home state due to the low filing fees and flow-through taxation. However, when startups decide to seek outside financing, they will typically need to convert to the Delaware corporate form. Delaware has a straightforward statutory conversion process (per DGCL § 8-265) that is relatively simple. Nonetheless, startups understandably have many questions when it comes to conversion. Here are answers to some typical questions:
What costs are involved?
Here’s a breakdown of the documents and forms that need to be completed and the associated fees:
|Certificate of Conversion (DE)||$164|
|Certificate of Incorporation||~$89 (minimum)|
|Certificate of Conversion (MI)||$35|
|Certificate of Authority (MI)||$60|
|Certificate of Good Standing||$50|
|Certified Delaware Agent||~$50/yr.|
|Delaware Franchise Tax||~$350/yr.|
The filing fees for the Certificate of Incorporation will vary depending on the amount of stock you authorize your corporation to have, unless you select a law par value (which most startups should do). All fees are payable to the Delaware Secretary of State. Note that if your entity is a Michigan LLC, you will need to file a Certificate of Conversion with the state of Michigan. Also note that if you plan to continue to base your operations in Michigan, you will have to fill out the abovementioned Certificate of Authority in order to transact business as a foreign entity.
How long does the process take?
According to the Delaware Division of Corporations, the processing time for a Certificate of Conversion and a Certificate of Incorporation is approximately two weeks (currently). However, the processing time can be expedited for an additional fee ($200 for Certificate of Conversion and $100 for Certificate of Incorporation).
What are the specific steps for converting a Michigan LLC?
This prior blog post outlines the steps to convert a Michigan LLC to a Delaware C Corp.
To summarize, these steps include:
- Confirming that law that will govern the internal affairs of the organization after conversion (i.e., usually Delaware law), and the surviving business organization permits conversion.
- Adopting a prescribed “plan of conversion.”
- Having the members of the LLC entitled to vote approve the plan of conversion (or using such other voting scheme specified in the Operating Agreement of the existing LLC).
- Filing formation documents required to be filed under the laws governing the affairs of the surviving business organization (see above), in the manner prescribed by those laws, and filing the required Certificate of Conversion with the State of Michigan.
If the resulting entity after the conversion will be transacting business in Michigan, it will need to apply for a Certificate of Authority. In order to apply for a Certificate of Authority, the corporation will also 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”).
Additionally, to move forward with a conversion, you need to determine the amount of total stock you plan to authorize (and its par value). Corporations that are seeking angel or venture capital funding typically have at least 10,000,000 authorized shares. Not all of these shares will be distributed initially as it is typical to place approximately 10-20% of authorized shares into a reserve pool for future stock options. Startup corporations should typically specify a low par value in their Certificate of Incorporation, as discussed in this prior post.
Hopefully the above illuminates the conversion process and answers many basic questions a startup may have. However, remember that converting from an LLC to a C Corp is a big decision. Before converting, it’s important to ask if the conversion will suit the needs of your business, and also to educate yourself about the responsibilities and formalities that go along with operating a C Corp.