Introduction to Converting California Corp or LLC to Delaware Corporation

If you are an owner of a corporation or a limited liability company in California and you want to expand or are looking for venture capitalists and investors in another state like Delaware then what are your options? One of the options is to convert California to Delaware Corp or LLC. This type of conversion is also known as “Reincorporation” as this term refers to a variety of transactions that enables an entity to move from one state to another or even change from one entity type to another. For example, if you want to convert a California entity to a Delaware entity, this is an option. Conversions are considered as statutory mechanisms that a state provides to business entities thus allowing them to convert from one foreign entity to another entity in the state e.g., Delaware allows foreign LLCs and corporations to convert into a Delaware corporation or LLC.

Conversion of California Business Entity to Delaware Corp

It is never easy to set up a new business and once it is operational in California; the very thought of conversion or reincorporation into another or same business entity in another state like Delaware may be unnerving. It can be quite an elaborate undertaking especially if you are planning to convert California LLC to Delaware Corp. The conversion will be governed by Delaware laws and not California laws and hence, documentation required for the conversion should be compliant to the Delaware business laws.

You can convert a California entity to a Delaware entity and historically speaking, this type of conversion has been quite a common transaction for Delaware. There are however several reasons that drive this type of reincorporation or conversion to a Delaware business and the reasons may be different for different types of entities.

Why convert a California business entity to Delaware LLC or Corporation?

Each business has its own set of requirements and once a business achieves growth; the thought of expansion could be one of the reasons that may drive business owners and entrepreneurs to convert foreign LLC to Delaware LLC or corporations. Let’s take a look at the most common reason for conversion.

Attract investors or VC’s: One of the primary reasons that drive this conversion is attracting investors and venture capitalists. Delaware has a strong startup ecosystem along with a pro-business regulatory and legal environment, and it’s no hidden fact that venture capital firms and other investors prefer Delaware business corporations. Entrepreneurs prefer to convert California LLC to Delaware Corp as it is difficult to transfer ownership in an LLC. Secondly, from a VC’s point of view, because an LLC is a pass through entity, the profit and losses of the business will reflect in the business owners tax return and this creates tax related problems or issues for VC’s and other investors.

There can be other reasons as well like expanding into the Delaware market, moving permanently to Delaware, or setting up a branch office.

Reincorporate a Business from a California Entity to a Delaware Entity

A business corporation formed in California may want to reincorporate in the state of Delaware owing to a number of business, economic, or financial reasons that properly address the growing needs of the company. Reincorporation is a term that is used for a variety of transactions that result in an entity’s movement or transfer to a state other than its home state or switching entity type. For instance, if you convert California LLC to Delaware Corp then it would be switching. The process of reincorporation normally involves a quick and simple statutory mechanism that involves filing of specific forms related to conversion. However, in order to convert foreign LLC to Delaware LLC or corporation, both states (the home state and the new state) should accept the process of conversion.

If you have formed a corporation in California then it is important to understand that it is one of the few states that don’t recognize conversion. Hence, it will not allow you to convert a California entity to a Delaware entity or a domestic corporation into a foreign corporation. So, if you want to convert a California Corp to Delaware Corp then there are three methods to choose from and they are merger, asset sale, and stock-for-stock exchange. Let us delve a little deeper into these three methods.

Merger

If you want to convert California Corp to Delaware Corp through reincorporation using a merger, then there are specific statutory requirements that you need to follow or be compliant with. This type of merger is also known as a reverse merger or even a downstairs merger where-in you want to reincorporate in another state or jurisdiction. A downstairs or reverse merger is a type of transaction where-in the desired entity type is formed in a new state and the existing entity in the home state is merged with this new entity. This is considered quite a complex transaction as compared to a conversion or asset transfer. Let’s look at an example to understand how a merger can help convert a California entity to a Delaware entity.

As an existing California corporation, you will need to create a new subsidiary in Delaware. This subsidiary is considered to be a shell corporation as it does not have any assets or businesses. Now, in order to convert a California Corp to Delaware Corp, the California Corporation merges into the newly formed Delaware subsidiary while ensuring the Delaware Corporation remains as the surviving entity. Post this merger, the stock and other securities of the Delaware subsidiary corporation will have preferences, rights, restrictions, and privileges identical to that of the California Corporation.

The California Corporations Code (CCC) requires the board of directors of the California Corporation as well as the Delaware subsidiary to approve the agreement of merger before you convert a California entity to a Delaware entity. The California and Delaware corporations participating in the merger need to sign the agreement of merger after reading the terms and conditions of the merger and amendments, if any, to the articles of the surviving Delaware corporation. The surviving corporation or the Delaware entity will be required to file a copy of the agreement of merger, along with officers’ certificates of each of the constituent corporations with the office of the California Secretary of State.

Due to recent regulatory changes in the State of California, completing the merger has become more complex. The process now requires active cooperation from all participants, extensive legal documentation, and often necessitates the involvement of legal counsel. Participants need to obtain the required legal documents before initiating the process.

Asset sale

An asset transfer is one of the ways to convert California LLC to Delaware Corp. It refers to the fact that the newly formed business entity (Delaware corp) purchases the assets belonging to the former entity (California LLC). The process of asset sale will involve a California entity selling off all its assets to the Delaware entity and then the California entity is dissolved. It is important to ensure that prior to the asset sale, a new Delaware entity or corporation is formed so that transfer of assets can take place. The Delaware entity has to be formed with all desired interests, securities as well as stockholder rights and privileges. If you convert a California entity to a Delaware entity through asset sale then the shareholders of the converting entity will receive stock in the newly formed Delaware Corporation as for the sold assets.

Stock-for-stock exchange

A stock-for-stock exchange is the third way to convert a California Corp to a Delaware Corp. This exchange takes place when the newly formed Delaware Corporation issues as well as exchanges the shares of its unissued and authorized common stock to the shareholders of the converting California Corporation in exchange for all the outstanding shares of the said entity’s stock. This method to convert a California entity to a Delaware entity can be employed only if the converting California Corporation is closely held and its shareholders accept or allow the exchange to take place.

Need Any Assistance in Converting Your California Business Entity to Delaware Corporation?

If you have formed a business in California and want to now convert California LLC to Delaware Corporation then the entire process can be quite difficult and frustrating. This is more so because California doesn’t support domestic companies opting for conversion to foreign entities. Hence, you would have to choose to go with a merger, asset sale, or stock-for-stock exchange.

We, at IncParadise are one of the leading and experienced incorporation service providers in California and Delaware. We can guide you through the entire process of California business entity conversion to a Delaware entity.

We provide a variety of additional services in California and Delaware including EIN assistance, foreign qualification, new business formation, annual report for all US states, and Certificate of Good Standing among others. Apart from our additional services, you can also opt for our registered agent services in California and Delaware.