What is Conversion?
Section 1.002 of the Texas Business Organizations Code (the “BOC”) defines “conversion” as follows:
- the continuance of a Texas entity of one type as a Texas entity of another type;
- the continuance of a Texas entity as a foreign entity of any type; or
- the continuance of a foreign entity as a Texas entity of any type.
Conversion Vocabulary
“Converting Entity” means the entity that existed before the conversion.
“Converted Entity” means the entity resulting from a conversion.
“Entity Type” Common entity types are corporation, limited liability company (LLC), limited partnership (LP), or general partnership (GP).
“Foreign Entity” means an out of state entity.
What ways does Conversion work?
The three most common ways of Conversion are (i) dissolution/formation, (ii) merger, and (iii) statutory conversion.
Dissolution/formation: The converting entity is wound up, liquidated, and dissolved, and the converted entity is formed. The converting entity’s ownership, assets, and liabilities is transferred by a separate agreement(s) between the owners. This type of Conversion may involve time consuming winding up, liquidating, and agreement drafting processes, and complicated taxation.
Merger: The converting entity is merged into a converted entity. The converting entity ceases to exist, and the converted entity is formed. The converting entity’s ownership, assets, and liabilities are transferred to the converted entity by law.
Statutory conversion: The converting entity ceases to exist, and the converted entity is formed by filing required conversion documents with the secretary of state of the relevant state(s). The converting entity’s ownership, assets, and liabilities are transferred to the converted entity by law.
When choosing a Conversion method, parties are advised to consult with their financial or tax advisors to avoid inadvertent tax consequences. In this Q&A, our focus will be on the statutory conversion involving a Texas entity.
Which law governs Statutory Conversion?
The conversion is governed by the BOC. However, if the conversion involves a foreign entity (either as a converting entity or a converted entity), the statutory requirements of the relevant foreign jurisdiction must be satisfied as well. In addition, the converting entity’s governing documents may provide rules or restrictions on the entity’s conversion. Review the converting entity’s governing documents as follows:
- If the converting entity is a corporation: bylaws, certificate of formation, shareholders’ agreement etc.;
- If the converting entity is an LLC: certificate of formation, Company Agreement, Membership Purchase/Transfer Agreement, etc.; and
- If the converting entity is a GP or LP: certificate of formation, partnership agreement, etc.
What documents are required for a Statutory Conversion?
- Plan of Conversion
- Certificate of Conversion
- Certificate of Formation
What is a Plan of Conversion?
For a conversion, the converting entity must first adopt a written plan of conversion. Pursuant to Section 10.103 of the BOC, a plan of conversion must be in writing and must include:
- the name of the converting entity;
- the name of the converted entity;
- a statement that the converting entity is continuing its existence in the organizational form of the converted entity;
- a statement of the type of entity that the converted entity is to be and the converted entity’s jurisdiction of formation;
- if Sections 10.1025 (Conversion and Continuance) and 10.109 (Special Provisions Applying to Conversion and Continuance) do not apply, the manner and basis, including use of a formula, of converting the ownership or membership interests of the converting entity into ownership or membership interests of the converted entity;
- any certificate of formation required to be filed under this code if the converted entity is a filing entity, which may be included in the plan of conversion by an attachment or exhibit to the plan;
- the certificate of formation or similar organizational document of the converted entity if the converted entity is not a filing entity, which may be included in the plan of conversion by an attachment or exhibit to the plan; and
- if Sections 10.1025 (Conversion and Continuance) and 10.109 (Special Provisions Applying to Conversion and Continuance) apply, a statement that the converting entity is electing to continue its existence in its current organizational form and jurisdiction of formation after the conversion takes effect.
Note: Section 10.1025 only applies when the conversion involves a non-United States entity, and the form of entity does not change. Section 10.109 only applies when Section 10.1025 applies.
Certificate of Conversion
A certificate of conversion must be filed by the converting entity with the SOS, if the Conversion involves a Texas filing entity. A certificate of conversion must include following:
- Converting Entity information such as the legal name, the jurisdiction, date of formation, and the file number.
- A plan of conversion or a statement certifying:
- the converting entity’s name, entity type, principal place of business, and jurisdiction of formation;
- the converted entity’s name, entity type, principal place of business, and jurisdiction of formation;
- that a signed plan of conversion is on file at the principal place of business of the converting entity;
- that a signed plan of conversion will be on file at the principal place of business of the converted entity;
- that a copy of the plan of conversion will be furnished on written request without cost by the converting entity before the conversion or by the converted entity after the conversion to any owner or member of the converting or converted entity.
- A statement certifying that the plan of conversion has been approved as required by the laws of the jurisdiction of formation and the governing documents of the converting entity.
- A certificate from the comptroller of public accounts that all taxes have been paid by the converting entity or a statement certifying that the converted entity will be liable for the payment of any franchise taxes.
- A Certificate of Formation for the converted entity, if the converted entity is a Texas filing entity.
Optional blank certificates of formation forms are available on the SOS website as follows (This is not an exhaustive list.):
- Certificate of Conversion of a Corporation Converting to a:
- General Partnership (Form 631);
- Limited Liability Company (Form 632);
- Limited Partnership (Form 633); and
- Real Estate Investment Trust (Form 634).
- Certificate of Conversion of a Limited Liability Company to a
- General Partnership (Form 635);
- Corporation (Form 636);
- Limited Partnership (Form 637); and
- Real Estate Investment Trust (Form 638).
- Certificate of Conversion of a Limited Partnership to a:
Certificate of Formation for the Converted Entity
A certificate of formation must be filed with the certificate of conversion if the converted entity is a Texas filing entity. Optional blank certificates of formation forms are available on the SOS website as follows:
- Form 201: Certificate of Formation for a For-Profit Corporation;
- Form 202: Certificate of Formation for a Nonprofit Corporation;
- Form 203: Certificate of Formation for a Professional Corporation;
- Form 204: Certificate of Formation for a Professional Association;
- Form 205: Certificate of Formation for a Limited Liability Company;
- Form 206: Certificate of Formation for a Professional Limited Liability Company; and
- Form 207: Certificate of Formation for a Limited Partnership.
When does Conversion become effective?
- If a certificate of conversion is required, the conversion becomes effective as of the date specified in the certificate of conversion as follows:
- when the certificate of conversion is filed with the SOS;
- at a later date, which is not more than ninety (90) days from the date of signing of the certificate of conversion; or
- upon the occurrence of a future event or fact, other than the passage of time.
- If a certificate of conversion is not required, the conversion becomes effective as of the date specified in the plan of conversion.
Can Conversion involve a foreign entity?
Yes, however, such inter-state conversion is only allowed if both states allow Conversion. Some jurisdictions do not allow Conversion, for example, until January 1, 2023, California did not allow California corporations to convert into a foreign entity. Thus, a California corporation had to be converted into a different entity type first (e.g., California limited liability company) and then converted into a foreign entity.