Can I convert my business?

 

Dear Clients, Friends and Colleagues,

Very often, liability can be reduced or the financial and operational goals of business owners can be better achieved by changing a company’s legal structure, e.g., general partnership (GP) to limited liability partnership (LLP), for-profit corporation to non-profit corporation, corporation to limited liability company (LLC), etc. There are a number of ways a company can change its structure. Consider the following brief summary of the more widely used methods for transforming companies…

One-Step Transformations…

At times, a transformation can be achieved without the separate transfer of assets or ownership interests.

  • Conversion. In recent years, a variety of one-step conversion approaches to transformation have become available. A conversion makes it possible for a company to transform itself by a single and simple filing. A common example is the conversion of a GP into an LLP. A significant advantage of such a conversion is that the LLP provides a liability shield, whereas partners of a GP face unlimited personal liability for partnership debts.
  • Merger. A merger is a very traditional way of transforming a business. However, unlike a conversion, a merger involves two existing companies. Most typically, one company “absorbs” the other and the “absorbing” company acquires all the rights and interests of the company being absorbed.

Multi-Step Transformations…

Where a one-step transformation is unavailable or undesirable, a similar result can be reached by transferring the assets or ownership interests of an “old” company into a “new” company.

  • Assets-Over. In an “assets-over” approach, the old company transfers all of its assets and liabilities to a new company in exchange for ownership interests in the new entity, with the old company then making a liquidating distribution of those ownership interests to the owners of the old company.
  • Assets-Up. In an “assets-up” approach, the old company liquidates first, and its owners contribute the assets and liabilities of the old company they receive to the new company in exchange for the ownership interests of the new company.
  • Interests-Over. In an “interests-over” approach, the ownership interests in the old company are contributed to the new company, and the old company is then liquidated.

Tax Only Reclassifications…

Partnerships and LLCs can choose how their income will be taxed. For example, an LLC can elect to be taxed as a Subchapter C or S corporation with a simple filing. Tax transformations are controlled by federal tax law and normally do not change the state law characteristics of the company (e.g., management, liability protection, transfer of ownership, etc.).

Other Considerations…

In most cases, a transformation will require or result in the creation of a new legal entity. As such, additional steps may be required to complete the transformation, for example, assigning leases and other contracts, amending or acquiring new insurance policies, establishing new bank accounts, obtaining new tax identification numbers, transferring or obtaining new business licenses, etc. Where real property is involved, a transformation may trigger land use and environmental concerns, require conveying property by deed, and necessitate amending or acquiring new title insurance policies, too.

Conclusion…

Changing the legal structure of a business can offer great advantages, but it can have significant negative consequences as well. Thus, it is prudent to obtain competent legal and tax advice when considering a business transformation.

 

DISCLAIMER: This BLOG post is provided solely for the general interest of the reader. It is not legal advice or opinion. Legal advice and opinion are provided by the firm only upon engagement with respect to specific factual situations.

6/12/2017

Keep Your Companies Separate!

Are your companies too close for comfort?

A recent New Jersey case illustrates the principle that New Jersey courts may have jurisdiction over business entities if they “lead a double life” in New Jersey. Consider the following…

The Case

The facts of the underlying case are simple enough. Tyler Bell (“Bell”) personally guaranteed a loan made by Investors Bank (“Investors”). As part of its collection efforts, Investors obtained a judgment against Bell as well as an order directing that a portion of Bell’s income be paid over to Investors to satisfy the judgment. Here’s where things get a bit unwieldy.

Bell, a Florida resident argued that his employer, National Cable and Internet, was a Florida limited liability company (“LLC”). Bell further argues that a New Jersey court could not compel a Florida employer to turn over Bell’s income to Investors. If the Florida company was registered to do business in New Jersey, the company would, presumably, be required to comply with the New Jersey court order. Whether or not the Florida company was registered in New Jersey appears to have been in dispute. However, the court found a different basis to compel the Florida company to comply with its order.

As it turned out, an officer of the Florida LLC formed an LLC named “National Cable and Internet” in New Jersey. Not only did the two LLCs have the same name, the officers and members of the two LLCs were similar (if not the same). As such, the court reasoned that the Florida LLC was doing business in New Jersey through its New Jersey “alter ego” and, accordingly, Bell’s employer was required to comply with the New Jersey court order to pay over a portion of Bell’s wages to Investors. Bell appealed the ruling, but the New Jersey Appellate Division agreed with the trial court and affirmed the decision.

Conclusion

The failure to sufficiently distinguish affiliated business entities can unexpectedly expose a company to the reach of courts in other states. Please feel free to contact me if you would like more information about the case, Investors Bank v. Travelers Cable TV, Inc. (A-2496-15T2, May 5, 2017).

DISCLAIMER: This BLOG post is provided solely for the general interest of the reader. It is not legal advice or opinion. Legal advice and opinion are provided by the firm only upon engagement with respect to specific factual situations.

5/25/2017

Why do so many (large) companies choose to incorporate in Delaware?

Many are surprised to learn that the chief reasons are unrelated to taxation. In fact, they are…

1. The Statute. The Delaware General Corporation Law is regarded as relatively flexible, which allows great ability to structure the relationship between a corporation’s shareholders (i.e., owners), directors (i.e., managers) and officers (i.e., executive agents).

2. The Case Law. Given the age of Delaware’s corporate law and the large number of Delaware corporations, there are many reported cases law interpreting corporation law and resolving difficult questions.

3. The Courts. The Delaware courts are regarded as being comprised of judges who are very knowledgeable in matters of corporate law.

4. The Legislature. Delaware’s legislature is responsive to the corporate legal community and recognizes the need to keep the State’s corporation law current and effective.

5. The Commercial Recording Office. The recording office, which processes a variety of state corporate filings, is regarded as having a knowledgeable and helpful staff.

For similar reasons, Delaware is a popular place for forming limited liability companies and limited partnerships, too.

Should I incorporate or form my (small) business in Delaware?

Well, in most cases, the state in which your company will be physically located and will conduct most of its business will be the best choice. When you think about it, are the above reasons really that important to a small or startup company? Probably not.

Are there disadvantages to forming or incorporating in a state other than where my company will be located and will conduct its business? 

Yes. Consider the following…

1. Registration as a Foreign Company. If a company that is formed/incorporated in one state conducts significant and pervasive business in a second state, the second state can require it to “register” (a.k.a., “qualify” or “obtain authority”) to do business in the second state. This will often require additional filings and fees, as well as designating a registered agent in the second state.

2. Expertise. You many need legal and tax counsel familiar with the laws and customs of more than one state.

3. Securities Registration. Issuing ownership interests (e.g., stock, membership interests, partnership interests) to a resident of a state other than the state in which your company is domiciled (i.e., “lives”) is more likely to require the registration of the ownership interests with state or federal securities agencies.

For these and other reasons, the added burdens of forming or incorporating in a “distant” state may far outweigh the benefit, if any, gained.

Wait a minute! My “small” company is going to be the next Apple. Shouldn’t I incorporate in Delaware now?

Well, as an aside, Apple is a California corporation. But, that’s a fair question. In the vast majority of cases, the initial state of incorporation will not present a barrier to attracting venture capital or “going public” because there will be ample opportunity to change the company’s state of incorporation should the need arise.

Concluding thoughts… The determination of where to form or incorporate a company raises important legal and tax issues and, therefore, it is in the best interest of the entrepreneur to seek the advice of competent counsel when choosing the state of formation/incorporation.

March 27, 2017

DISCLAIMER: This BLOG post is provided solely for the general interest of the reader. It is not legal advice or opinion. Legal advice and opinion are provided by the firm only upon engagement with respect to specific factual situations.

Changing Your Company’s Structure

Very often, liability can be reduced or the financial and operational goals of business owners can be better achieved by changing a company’s legal structure, e.g., general partnership (GP) to limited liability partnership (LLP), for-profit corporation to non-profit corporation, corporation to limited liability company (LLC), etc. There are a number of ways a company can change its structure. Consider the following brief summary of the more widely used methods for transforming companies…
 One-Step Transformations…

At times, a transformation can be achieved without the separate transfer of assets or ownership interests.

  • Conversion. In recent years, a variety of one-step conversion approaches to transformation have become available. A conversion makes it possible for a company to transform itself by a single and simple filing. A common example is the conversion of a GP into an LLP. A significant advantage of such a conversion is that the LLP provides a liability shield, whereas partners of a GP face unlimited personal liability for partnership debts.
  • Merger. A merger is a very traditional way of transforming a business. However, unlike a conversion, a merger involves two existing companies. Most typically, one company “absorbs” the other and the “absorbing” company acquires all the rights and interests of the company being absorbed.

 Multi-Step Transformations…

Where a one-step transformation is unavailable or undesirable, a similar result can be reached by transferring the assets or ownership interests of an “old” company into a “new” company.

  • Assets-Over. In an “assets-over” approach, the old company transfers all of its assets and liabilities to a new company in exchange for ownership interests in the new entity, with the old company then making a liquidating distribution of those ownership interests to the owners of the old company.
  • Assets-Up. In an “assets-up” approach, the old company liquidates first, and its owners contribute the assets and liabilities of the old company they receive to the new company in exchange for the ownership interests of the new company.
  • Interests-Over. In an “interests-over” approach, the ownership interests in the old company are contributed to the new company, and the old company is then liquidated.

Tax Only Reclassifications…

Partnerships and LLCs can choose how their income will be taxed. For example, an LLC can elect to be taxed as a Subchapter C or S corporation with a simple filing. Tax transformations are controlled by federal tax law and normally do not change the state law characteristics of the company (e.g., management, liability protection, transfer of ownership, etc.).

Other Considerations…

In most cases, a transformation will require or result in the creation of a new legal entity. As such, additional steps may be required to complete the transformation, for example, assigning leases and other contracts, amending or acquiring new insurance policies, establishing new bank accounts, obtaining new tax identification numbers, transferring or obtaining new business licenses, etc. Where real property is involved, a transformation may trigger land use and environmental concerns, require conveying property by deed, and necessitate amending or acquiring new title insurance policies, too.

Conclusion

Changing the legal structure of a business can offer great advantages, but it can have significant negative consequences as well. Thus, it is prudent to obtain competent legal and tax advice when considering a business transformation.

 

DISCLAIMER: This BLOG post is provided solely for the general interest of the reader. It is not legal advice or opinion. Legal advice and opinion are provided by the firm only upon engagement with respect to specific factual situations.

2/28/2017