Converting a California LLC to a Delaware C-Corp

Authored by Bryan Springmeyer Bryan Springmeyer is a California corporate attorney who represents startup companies. The information on this page should not be construed as legal advice.

The conversion of a California LLC has been a historically common transaction for us, due to founder originally forming as a California LLC and needing to switch to a Delaware C-Corp in connection with a financing and/or moving towards a venture capital path. There are some tax benefits that apply to qualified small business stock (QSBS) that investors want to avail themselves of, and a requirement for QSBS is that the corporation be a domestic C-Corp. Given the pending changes to tax law for 2018, one of the main reasons that C-Corps were unappealing, double-taxation, is no longer a deterent. Companies will likely give heavier consideration to forming as C-Corps or converting their existing LLC to a corporation.

Converting a California LLC to a Delaware C-Corporation is one of the easier "reincorporation" transactions. This is because both states offer a conversion statute that allows for the formation of a new Delaware corporation, and some simple filings in each state to let them know that the newly formed corporation is the continued existance of the former California LLC.

The process for the converting the California LLC involves writing up a plan of conversion that explains the details of how the conversion will work and how membership interests will convert to shares of the newly formed corporation. The company’s membership interests must vote to approve the plan of conversion and a certificate of conversion gets filed with the California Secretary of State.

A separate certificate of conversion also gets filed in Delaware, along with a regular certificate of incorporation for the converted entity. The company will go through all of of the regular processes involved in forming a new Delaware Corporation. The main difference from formation of a brand new entity is that documents get modified to include language reflecting the conversion.

Note that the basic structure and the way the shares held in the new corporation has to reflect how the LLC was set up as of the date of the conversion. So, for example, if LLC membership interests are not subject to vesting in the LLC operating agreement when the company is about to convert, shareholders of the converted corporation would hold fully vested shares upon conversion. If the intent is to have founders be on a vesting schedule in the converted corporation, either the LLC’s operating agreement could be amended to implement vesting prior to conversion or the corporate stock purchase agreements could be later amended to implement vesting. Such changes can be done in these alternative ways but would not be effected simultaneously with the conversion.

Related Pages:

Reincorporating in Delaware
Where Should I Incorporate? California versus Delaware
Why Startups Incorporate in Delaware
LLC Member Dissenter's Rights in Reorganizations
Starting/Registering a Delaware Corporation in California