On July 1, 2017, among a host of other changes to the Illinois Limited Liability Company Act that will go into effect, Illinois will join the majority of states that allow limited liability companies (LLCs) to convert to other entities such as corporations or partnerships (including entities in other states), to domesticate from Illinois to another state, and vice versa. Until the effective date, Illinois has been in the minority of states that do not allow conversions or recognize entity conversions or domestications to or from other states. Previously, entities wishing to undergo a conversion or domestication process in Illinois were required to undergo a two-step merger process, usually involving the formation of an entirely new entity and the merger of the old entity into the new one.
Once the new law goes into effect, Illinois LLC conversion or domestication can take place provided that:
- the statute governing the form of the new entity authorizes the conversion or domestication;
- the entity seeking a conversion submits a plan of conversion or domestication, as applicable, which includes the entity’s name before and after the conversion or domestication, the terms and conditions of the conversion or domestication, and any organizational documents of the converted or domesticated entity; and
- if the converting or domesticating entity is an LLC, all of the members consent to the plan of conversion or domestication.
After the plan of conversion or domestication has been approved, in addition to any filings required by the governing law of the other state, if applicable, the converting or domesticating entity must submit various forms and other required documentation to the Illinois Secretary of State, which vary depending on the form of the converting or converted entity. On completion, the new entity inherits the previous entity’s property, rights, liabilities and obligations.
Importantly, Illinois law currently does not authorize Illinois corporations to convert into other entity forms or domesticate into other states, so an LLC is unable to convert to or from an Illinois corporation under Illinois law. However, the Illinois legislature currently is considering legislation, the Entity Omnibus Act (HB 2963), that would authorize all entities governed by Illinois law to convert into other entity forms or domesticate to another state. The Entity Omnibus Act has been placed on the legislative calendar for a third reading, and if passed, will take effect July 1, 2018.
It is important to note that, if an Illinois LLC converts or domesticates into an entity from another state, the entity should file a foreign qualification with the Illinois Secretary of State if it wishes to continue conducting business in Illinois. Additionally, converting from an LLC to another entity form and vice versa may raise various tax issues. For instance, in some cases conversion may be a taxable transaction for federal or state income tax purposes. Additionally, the process and filing requirements for converting entities differ from state to state, so if another state entity is involved in a domestication, there may be additional requirements.
Our Corporate Practice Group has significant experience in converting and domesticating business entities, including tax planning related thereto. If you have any questions about business entity conversions, or you need assistance in converting your business entity, please contact an attorney in our Corporate Practice Group. The new conversion statute will be codified as 805 ILCS 180/37-5, et seq., and the text of the statute is available here. The full text of the changes to the Illinois Limited Liability Company Act, including the new conversion statute, is also available as Public Act 099-0637. The text of the Entity Omnibus Act (HB 2963), which, if signed into law, will permit conversion or redomestication to or from an Illinois corporation is available here.
The authors thank Jack Terschluse for his contributions to this article.