Business transactions that can lead to LLC structure changes
ComplianceMarch 01, 2021

Business transactions that can lead to LLC structure changes

From the LLC Handbook

Limited liability companies (LLCs) are one of the most popular business entity forms. But an LLC is not a static entity and there are certain triggers that may lead to structural changes to the LLC, such as a merger, a change to its registered agent, conversion to another business entity, or dissolution.

In this article we explore the business transactions that can lead to changes to an LLC’s articles of organization and overall structure and steps businesses should take to ensure they follow due process.

Mergers

A merger is a combination of two or more business entities in which the assets, businesses, and liabilities of all the entities are transferred to one, which continues to exist, while all other entities disappear. An LLC may enter into a merger for a number of reasons. They include to acquire or sell a business, to reorganize its operations, to change to a different entity type, or to change its state of organization.

An LLC may merge with or into another domestic or foreign LLC. This is known as a “like-entity” or “same-entity” merger. An LLC may also merge with or into another type of business entity. This transaction is known by several names, including a “cross-entity” or “multi-entity” merger. The statutes vary somewhat in how they define “other business entities”.

Most, however, have a broad definition and allow LLCs to enter into mergers with domestic or foreign corporations, general partnerships, limited partnerships, limited liability partnerships, and other organizations.

Effecting a merger

The statutory procedure for entering into a merger generally calls for the LLC to adopt and approve a plan of merger. In general, the plan must at least contain the terms and conditions of the merger and the manner and basis for converting the interests of each party to the merger into interests or obligations of the survivor or into money or other property.

The plan must then be voted on by the members. The operating agreement may provide for the number or percentage of members that must vote in favor of a merger for it to be approved. In the absence of a provision in the operating agreement, the statutory default rule will apply. If there are foreign LLCs or other entity forms involved in the merger, they must approve the plan as required by their governing law and documents.

Following approval of the plan, articles of merger or a certificate of merger must be filed with the state filing officer. The merger takes effect when this document is filed, or upon a later effective date that may be set forth in the document.

Conversion

The states have provisions authorizing an LLC to convert to another business entity and/or authorizing another business entity to convert to a limited liability company. A conversion is a statutory transaction in which one type of business entity becomes a different type of business entity—such as an LLC becoming an LP. In a conversion, all assets, property, debts, and liabilities of the converting entity vest in the converted entity. The converted entity is for all purposes the same entity as existed before the conversion, just in a different form. In some states a conversion can also be used to change the jurisdiction of formation – such as domestic LLC in State A becoming a domestic LLC in State B.

Effecting a conversion

Although a conversion involves only one entity, it involves two entity statutes—the one governing the converting LLC or other entity, and the one governing the entity into which it will convert. It is important to check both statutes—to make sure they each authorize the proposed
conversion and to find out what steps have to be taken to effect the transaction.

In general, an LLC may convert to another business entity by approving a plan of conversion that contains the terms and conditions of the conversion and the manner and basis of converting the membership interests into interests of the converted entity. The members must approve the plan. Then the converting LLC must file articles of conversion. If the LLC is converting to a statutory entity such as a limited partnership or corporation, it will have to file a formation document.

If another business entity wants to convert to a limited liability company, the laws generally state that the entity must take all steps required by the laws of its jurisdiction of formation and by its constituent documents, and then file articles of conversion and articles of organization with the state.

Amendments and changes

Any limited liability company may, within statutory guidelines, amend its original articles of organization by adding a new provision, modifying an existing provision, or deleting a provision in its entirety. The only limitation is that the new provisions must be ones that could lawfully be contained in the articles of organization at the time of the amendment.

Some Acts specifically require an amendment to be made upon the happening of certain events—such as a change of name. Others state that an amendment must be made upon an occurrence that makes any of the information in the articles of organization false or inaccurate. The amendment procedure, such as the vote required for approval, is generally set forth in the operating agreement. For the amendment to be effective, the LLC will have to file articles of amendment, signed by an authorized person.

Procedures for amending the operating agreement are generally set forth in the operating agreement. Some states have default rules requiring a vote of all members to amend the operating agreement.

An LLC will also have to notify the state through a required filing when it changes its registered agent or its registered agent’s address.

Restatements

Many LLC Acts permit the filing of articles of restatement. Articles of restatement allow the company to restate into a single integrated instrument, all the provisions of its articles of organization currently in effect. A restatement is particularly useful where the articles of organization have been amended several times, thereby making it difficult to tell which provisions are actually in effect and expensive when certified copies of the articles of organization and all amendments thereto must be obtained from the state.

Corrections

Most states permit the filing of articles of correction if the articles of organization contained an inaccurate statement when originally filed or were defectively signed. Corrections have the advantage of relating back to the effective date of the original articles of organization. Many states also permit articles of corrections to be filed to correct documents in addition to the articles of organization.

Dissolution

The LLC Acts have provisions setting forth the events that will cause the dissolution and winding up of an LLC. They include a time set forth or the happening of an event specified in the articles or operating agreement. Thus, for example, an LLC may be formed for one business venture only, and the operating agreement may require dissolution after the venture is completed.

An LLC may also be dissolved upon the consent of the number or percentage of members specified in the operating agreement (or, in the absence of a provision in the operating agreement, by the statutory default provision).

After the happening of an event causing dissolution, the limited liability company’s existence continues only for the purpose of winding up its business. At any time after dissolution and winding up, a limited liability company may terminate its existence by filing a document, generally called articles of termination or articles of dissolution. The LLC’s existence terminates upon the filing of the articles or upon a later effective date if specified in the articles. In some states, the articles must be accompanied by proof that all taxes have been paid. Some states require a filing of a notice of dissolution at the time the winding up begins.

Administrative dissolution

An LLC may be administratively dissolved by an act of the state filing office. Once administratively dissolved, the LLC may not carry on any business other than that necessary to wind up and liquidate its affairs and notify claimants. The grounds for administrative dissolution vary by state, but generally include a failure to pay any fees, taxes, or penalties due or deliver its annual report within a certain period of time after the due date. The failure to maintain an agent for service of process or notify the state of a change in agent are also grounds found in a number of statutes.

Many LLC laws also provide that an administratively dissolved company may apply for reinstatement. In its application, the LLC must state that the grounds for dissolution no longer exist. Under some laws, there are a limited number of years after administrative dissolution that reinstatement is possible. When reinstatement is effective, it relates back to and takes effect as of the effective date of the administrative dissolution and the company may resume its business as if it had never been dissolved.

However, if another entity formed or registered under its name while it was dissolved, the LLC may have to choose another name when reinstating.

For more information on LLCs,  please see The LLC Handbook

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