What is the Difference Between a Statutory Conversion and a Statutory Merger?

Is your startup currently structured as a partnership, a limited liability company (LLC), or even a sole proprietorship? Depending on your goals for your startup and your plans for funding and raising capital, one of these structures may work perfectly well for your business. However, many entrepreneurs initially found a startup and structured the business as a partnership, LLC, or sole proprietorship at the start, only to learn that what they really want and need is a business that is structured as a C corporation (or a C-corp for short). Often, in order to obtain equity financing, and especially equity financing from venture capital or VC, you will need to have a startup that is structured as a C-corp.

If you are currently in this latter circumstance and looking into options for changing the structure of your business, depending on where your business is domiciled, you may be looking at either a statutory conversion or a statutory merger. These are two separate processes, and it is crucial to understand the difference, as well as which is available to your business.

Statutory Conversion 

A statutory conversion is only available in particular states. As the name suggests, it is available in particular states by statute. In general, this is the most streamlined option for a startup founder who wants to convert to a C-corp. A statutory conversion typically allows a partnership or LLC to convert to a C corporation by filing paperwork in the state that has the option of a statutory conversion. Then, all of the startup’s assets and liabilities, contracts, and other legal components will automatically transfer.

Both Virginia and Washington, DC allow for statutory conversions (known as an “entity conversion” under Virginia law). New York does not currently have a statutory conversion option.

Statutory Merger

In states where there is no statutory conversion option such as New York, your startup can still change its structure to a C corporation, but it will need to go through a process known as a statutory merger.

With a statutory merger, a startup founder will need to actually create a separate C corporation. Then, the LLC or other entity will need to be merged into the new C-corp. While this is a more complex process than a statutory conversion, it is something that our lawyers can assist startup founders with.

Convert to a C-Corp the Right Way

If you initially founded your startup as a sole proprietorship, partnership, or limited liability company or LLC, you may want to change the structure of the business to a C corporation in order to seek specific types of funding, including venture capital. As we have discussed, it is often necessary to have a startup structured as a C corporation in order to obtain equity financing, especially involving venture capital. Depending on where your startup is located, you may be able to change the structure of your startup through a statutory conversion. In other states without the option for a statutory conversion, you will often need to consider a statutory merger instead, or, at worst, a nonstatutory merger or asset transfer.

One of the startup attorneys at Triumph Law can speak with you today to learn more about the details of your startup, to provide you with information about your options for converting to a C-corp, and to begin working with you on the process of changing the structure of your startup. Contact us for more information.

Source:

law.lis.virginia.gov/vacode/title13.1/chapter12/section13.1-1082/