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:
- An LLC may convert into a New Jersey (or “domestic”) corporation, following the adoption of a plan of conversion, by filing with the New Jersey Division of Revenue and Enterprise Services (1) a certificate of conversion, providing notice of the conversion that has taken place, and (2) a certificate of incorporation to govern the post-conversion corporation. The plan of conversion should indicate how membership interests in the LLC will convert into shares of the corporation’s stock (e.g., a 10% Class A membership interest could become 10 shares of common stock, and a 25% Class B membership interest could become 20 shares of Series A preferred stock and the right to receive $50,000 of cash), what the bylaws of the corporation will be, who will serve as the directors and officers, and answers to other essential organizational questions.
- A New Jersey corporation may convert into a New Jersey or non-New Jersey LLC if the corporation’s board and then shareholders approve a plan of conversion and the corporation then files a certificate of conversion with the Division of Revenue and Enterprise Services. As in the prior situation, the plan should indicate how shares of the converting corporation’s stock will convert into membership interests in the post-conversion LLC or other rights, and ideally include as an attachment the LLC’s initial operating agreement. If the LLC will be a New Jersey LLC, a certificate of formation for the LLC must also be filed along with the certificate of conversion. If the LLC will be a non-New Jersey (or “foreign”) LLC but will continue to do business in New Jersey, an application for authority should be filed.
- A business entity that is registered to do business in New Jersey may convert to a foreign corporation but remain qualified to do business in New Jersey by filing a simple application referencing the conversion, and without having to dissolve or withdraw its registration and then file a completely new registration.
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.