Statutory Conversion vs. Nonstatutory Conversion

The limited liability company (LLC) and the corporation are both formal business entities with plenty of their own advantages and disadvantages.

When you’re first forming your business, one or the other might seem like the right fit, but as your business grows and matures, you may realize that the other entity type would better suit your company.

If you decide that you’d like to convert your LLC to a corporation (or vice versa), there are two main ways to do this: you can execute a statutory merger or a statutory conversion. But there’s also a third option called the nonstatutory conversion.

What is the difference between these methods, and which is the best option for converting your business? In this article, we’ll discuss why the statutory conversion is the preferred method for converting business entities in the United States today, and also why the statutory merger and nonstatutory conversion have fallen out of favor.

What Is a Statutory Conversion?

The statutory conversion is the simplest way to convert your business from one entity type to another. Statutory conversions were introduced into the American business world fairly recently, and as such, they’re still only available in 35 states.

This process has some variance from state to state, but in general, it starts with the company’s ownership group agreeing to convert the business entity type and drafting a conversion plan. Then, those owners need to hold a vote to approve the conversion. In a corporation, you’ll need to provide the company’s stockholders with the plan so they can vote on it, while in an LLC, you just need a majority of the company’s owners to approve the plan.

The next step is to draft and file the certificate of conversion. The exact information needed to complete the certificate of conversion can vary depending on which state you’re converting an entity in, but generally speaking, you’ll need to provide the Secretary of State with the following information:

• The name of your entity
• The type of entity you’re converting from
• The jurisdiction where your business is located
• The mailing address of your business
• The name and address of your registered agent
• The entity type you’re converting to
• The results of the company’s voting process
• Signature of the entity’s authorized person

You will also need to prepare and file the formation documents for the business entity you wish to convert to — the articles of organization for an LLC, or the articles of incorporation for a corporation. Finally, you’ll need to formally dissolve your original business entity, and your statutory conversion is complete.

What Is a Nonstatutory Conversion?

A nonstatutory conversion is an antiquated method for converting one business entity type to another. The nonstatutory conversion starts with forming an entirely new business entity, followed by a vote to approve a merger between your existing entity and the new one.

Then, your business owners will need to voluntarily and formally trade in their ownership in your previous entity for ownership shares in the new entity. Finally, you’ll need to draft and file a document usually called a certificate of merger with your Secretary of State to officially merge the two companies.

You will also need to transfer the assets of your original business entity to the new one once it’s formed, and dissolve your original entity. The reason this is all such a hassle with a nonstatutory conversion is that you’ll need to draft agreement documents to complete each exchange of power and transfer of assets.

This can be a tremendous hassle, and it’s a complicated enough process that we would never recommend the DIY route — you would almost certainly need to hire a lawyer to assist you. Thankfully, hardly anyone actually needs to do a nonstatutory conversion these days, because there are two other much simpler methods to convert a business entity.

What Is a Statutory Merger?

The other common method for converting a business to a different entity is the statutory merger. Much like the nonstatutory conversion, the statutory merger starts with the formation of a brand-new business entity, followed by a vote to approve a merger between your existing entity and the new one.

Then, your business owners will need to voluntarily and formally trade in their ownership in your previous entity for ownership shares in the new entity. Finally, you’ll need to draft and file a document usually called a certificate of merger with your Secretary of State to officially merge the two companies.

The reason this is the less-preferable option compared to a statutory conversion is primarily because it’s much more of a hassle to create an entirely new business entity and merge it with your original entity than it is to simply convert an existing business. Furthermore, statutory mergers are more expensive, for this same exact reason.

Still, it’s easier to do a statutory merger than a nonstatutory conversion, because in a statutory merger, each transfer and conversion is completed automatically, and does not need separate transfer agreements like in a nonstatutory conversion.

Can I Hire a Service to Convert My Entity for Me?

If this process sounds like more of a hassle than you’re willing to take on, or if you would rather have the peace of mind that each step was completed correctly by a professional, you do have some options. You could hire a business attorney to convert your business entity, although this is an extremely expensive route that could see your expenses climb into the thousands of dollars.

Another option is to hire a business services company. While there aren’t nearly as many options as there are for forming an LLC or corporation, there are still several reputable companies offering business conversion service.

In Conclusion

The nonstatutory conversion is hardly ever used these days, as it has been replaced by the statutory conversion, and to a lesser extent, the statutory merger. This is fortunate, as the nonstatutory conversion is easily the most complicated of these three methods.

If the entity conversion process gets overwhelming, keep in mind that there are reputable companies that can help you out. If you run into any trouble, give Swyft Filings, LegalZoom, or BizFilings a call and they’ll handle the process on your behalf.

We hope this article helped you develop your understanding of statutory and nonstatutory conversions!