Starting June 12, 2014, Washington law allows for the “conversion” of Washington corporations and limited liability entities into a variety of other business entities in Washington and other states through the simple adoption of a plan of conversion and the filing of articles of conversion with the Secretary of State.
This streamlines the procedures for changing to or from a Washington corporation or limited liability company. It also simplifies changing the state of formation or incorporation from Washington to any other state having a similar conversion statute or vice versa.
This update summarizes the amendments to the Washington Limited Liability Company Act and the Washington Business Corporation Act establishing the new conversion process and requirements.
Highlights of the Amendments
Highlights of the amendments include:
- Streamlined Process. Historically, reincorporating or changing the form of a Washington business entity required the formation of a second (surviving) entity and either a merger or a transfer of assets and a dissolution of the original Washington entity. Under the amendments, conversion occurs through the filing of articles of conversion.
- Effect of Conversion. The amendments contemplate that the surviving entity in a conversion is the same entity that existed prior to conversion. Unless provided otherwise under non-Washington law governing the conversion, the conversion is not treated as a dissolution; the converting entity is not required to wind up its affairs, pay its liabilities and distribute its assets; and title to all real and personal property of the converting entity remains vested in the surviving entity.
Amendments Apply to Washington Corporations and Limited Liability Companies
Washington’s Uniform Limited Partnership Act had already allowed for conversion, so with the amendments to the Washington Limited Liability Company Act and the Washington Business Corporation Act, Washington now supports conversion of the three main business entities (corporations, limited liability companies and limited partnerships) via the filing of a certificate. Conversions to nonprofit corporations, mutual corporations, miscellaneous corporations or governmental or quasi-governmental organizations are not permitted.
Examples: Some examples of conversions that are permitted under the amendments:
- A Washington limited liability company may convert into a Washington corporation.
- A Delaware limited liability company may convert into a Washington limited liability company.
- A Washington corporation may convert into a Delaware limited liability company.
Caution: Tax Implications Remain the Same
The amendments do not change the federal income tax consequences of conversion—which can be significant and should be thoroughly examined prior to conversion.
Approvals Required for Conversion; Dissenters’ Rights
Conversion of a Washington corporation or limited liability company requires, in addition to approval by the converting entity’s board of directors or similar governing body, other shareholder/member/partner approvals, depending on the type of entity and conversion.
- Conversions of Washington corporations into any entity other than a foreign corporation and all limited liability company conversions. These conversions require unanimous shareholder/member consent; accordingly, no dissenters’ rights apply.
- Conversions of a Washington corporation into a foreign corporation. These conversions may be accomplished with less than unanimous shareholder consent and generally track the votes required to approve a merger of the Washington corporation. Dissenters’ rights apply if holders of outstanding voting shares of the converting corporation do not receive shares in the surviving foreign corporation that are the same in all material respects and that represent at least the same percentage interest of the outstanding voting shares of the surviving foreign corporation as the shares held before the conversion.
- Conversions of a foreign business entity into a Washington business entity. The determination of whether these conversions require approval or are subject to dissenters’ rights is governed by the organic law and organic documents governing the converting entity.
- Conversions in which a person would face personal liability. If a person would face personal liability as a result of the conversion (for example, a person becomes a general partner on the conversion of a corporation into a general or limited partnership), the amendments require the person to sign a separate written consent to accept that liability.
Once a plan of conversion has been duly approved, the conversion will be effected by the filing of articles of conversion with the Washington Secretary of State. If the conversion involves an entity formed under another state’s laws, the laws of that state may require a similar conversion filing.
If the surviving entity is a Washington corporation, the articles of conversion would include the articles of incorporation of the surviving corporation. Generally, conversion will require the preparation of other organizational documents for the surviving entity, such as bylaws for a surviving corporation, an operating agreement for a surviving limited liability company or a partnership agreement for a surviving limited partnership.