Entrepreneurs often start their business as a limited liability company (LLC). As the company grows and the need for outside capital comes to the forefront, entrepreneurs will often turn to angle investors, venture capitalists, or private equity for that much needed injection of capital. In the spirit of securing the financing, entrepreneurs will often be faced with demands from these investors to convert their business to a C corporation.
In this post I share with you a general overview of how to convert your LLC to a corporation. I will also share a list of consideration you should have in mind as you begin to plan for your conversion.
The process of converting a domestic business entity into a Massachusetts business corporation is governed by M.G.L. ch.156D §9.54. The very first step in the conversion process is for an officer or an authorized representative of the business to file an “Article of Entity Conversion”. It is critical to ensure the conversion is in accordance with the original business’s internal laws. This means the decision and approval to convert, for example from an LLC to a corporation, must be accordance with the operating agreement of the LLC. The owners of the to be corporation should also be ready to provide articles of incorporation addressing other issues including the number of shares to be issued by the corporation, par value of each share, whether there exists more than one class of shares, and, if applicable, the limitations and relative rights of each class of shares. Consideration should also be given to the vesting period for when an investor or founder can depart the company. Once completed, the articles of entity conversion are filed with the Secretary of State, and also with the Registry of Deeds of each district in the Commonwealth of Massachusetts where the corporation maintains real property.
After the incorporation, founders of the new corporation should prepare to draft corporate by-laws. In the spirit of securing outside financing and the expectations of outside investors on the entrepreneur, well-written bylaws spell out the operating rules of the business. Your new by-laws should at minimum address the key players of the business, the corporate meetings to manage the business, and how conflicts will be resolved. Key players include board members and officers. Meetings can be regular meetings, quarterly or annual meetings, and special meetings for exigent circumstances. While these meetings are used to discuss the status and direction of the meeting, they are also used for voting on corporate affairs and resolving conflict.
Turning to outside investors for capital is an exciting time for entrepreneurs. In the midst of excitement, entrepreneurs should remember to take time and structure their corporation in effective manner. A successful conversion must pay significant consideration to the articles of incorporation and corporate bylaws taking account of all the possible variations, the business’s needs, founders’ desires, and investors’ expectations.