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When the Revised Uniform Limited Liability Company Act (“RULLCA”) was enacted in New Jersey in 2012, New Jersey limited liability companies (“LLC”s) were faced for the first time with the possibility of undergoing a “conversion” into a different type of business entity or a “domestication” into a non-New Jersey LLC. Likewise, RULLCA suggested that other business entities could easily convert or domesticate to become New Jersey LLCs. There was just one catch: the governing statute of the other type of business entity, or of the non-New Jersey LLC, had to similarly permit such conversion or domestication. Delaware law allowed such conversions (conversion under Delaware law also encompasses domestication), so simple New Jersey-to-Delaware and Delaware-to-New Jersey transactions became possible. But, almost defying logic, the New Jersey Business Corporation Act was not simultaneously amended to permit conversions or domestications. As a result, LLC-to-corporation and corporation-to-LLC conversions in New Jersey remained out of reach.
Over ten years later, common sense has finally prevailed. On May 8, 2023, Governor Phil Murphy signed into law Senate Bill 142 (now P.L. 2023, c. 38), which takes effect 180 days after enactment, or on November 4, 2023. As a result:
These changes greatly simplify changes of entity type in New Jersey. No longer is it necessary to form a new entity and merge the old entity into it, which is more likely to trigger anti-merger covenants in contracts, particularly leases and loan agreements.
Of course, one should always consider the tax consequences of an entity change before undertaking it. An LLC that is taxed as a partnership (if multiple members) or disregarded entity (if a single member) for income tax purposes can usually convert to a corporate form tax-free, assuming there is no change in ownership, assets exceed liabilities, and several other conditions are met. But going the other way often triggers taxation of unrealized gains resulting from the appreciation of the converting corporation’s assets.
If you have any questions about this new law, or any other questions regarding the conversion or merger of New Jersey business entities, feel free to contact Jason Navarino, Hannah Greendyk, or any other member of Riker’s Corporate Group.