Washington’s Corporate Entity Conversion Bill Can Streamline Converting Your Small Business

Merging LanesWashington state continues its effort to be one of the more corporate-friendly states by passing a bill that streamlines the process of converting one business entity to another. Senate Bill 5999, which was signed into law by Governor Inslee on March 27, 2014, amends Washington’s Limited Liability Company Act and the Business Corporation Act to allow conversions of Washington LLCs, corporations, and limited partnerships. What’s more is that the bill also allows entites formed in another state (“foreign entities”) to convert into Washington LLCs and corporations.

The bill is set to be incorporated in the Revised Code of Washington in early July 2014. Stay tuned for the updated RCWs!

Why Would You Convert Your Business Entity?

Depending on your type of business and your business’s goals, there can come a time when converting your business into a new entity is necessary. For example, you may need to convert your LLC into a corporation when you raise capital from outside investors. Before this bill, converting an entity generally required creating a new entity, drafting and filing merger documents with the state, and drafting merger documentation to memorialize the transaction. This process is realively expensive and time-consuming, and it can be cost-prohibitive for many small businesses.

Washington’s entity conversion bill streamlines this process by allowing for one-step conversions between LLCs, corporations, and limited partnerships. Once the amended RCWs are released, businesses will be able to quickly and cheaply convert their business entity, and less deals will be delayed by the tedious merger process.

Mirror imageThe conversion does not result in any dissolution of the prior LLC or corporation. Once the entity is converted, it is for all purposes the same entity that existed prior to the conversion. Title to real estate and other property will remain vested and unimpaired in the new entity. All outstanding obligations, including debts and liabilities, will remain the responsibility of the new entity. Lawsuits by or against the old entity will be unaffected and continue by or against the new entity. The prior entity just takes a new form and will be subject to a new set of laws moving forward.

The Conversion Process in a Nutshell

The goal of the bill was to make a straight forward process for businesses to convert from one entity to another. If the entity is a Washington LLC, then the members (owners) must unanimously approve a plan of conversion–which is a detailed plan that lays out the terms of the conversion, including members’ rights and responsibilities after the entity is converted–and the company must file Articles of Conversion with the Secretary of State.

If you’re converting a corporation, the company needs unanimous shareholder approval of the plan of conversion, except when the corporation converts to a foreign corporation, i.e. the business is just changing which state is its “home state.” When a Washington corporation converts to a foreign corporation, the shareholder approval threshold is the same as if the shareholders were approving a merger. Shareholders maintain their dissenters’ rights if the terms of their shares after the conversion will not be at least as favorable as before the conversion.

The legislators also added some additional protection for any shareholders or members that will be subject to personal liability after the conversion. If this occurs, the company must have the shareholder or member sign a separate written consent agreeing to be held personally liable after the conversion.

For foreign entities that want to convert to a Washington entity, the company must file Articles of Conversion with the Secretary of State. If the foreign entity is becoming a Washington LLC, then it must also file a Certificate of Formation in order to maintain its limited liability status.

If you’d like to learn more about converting your entity or the new entity conversion rules in Washington, please comment below or contact me today.

Photo: Brendan Lynch | Flickr
Photo: Marco Kivela | Flickr

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