July 23, 2021 at 09:27 AM | The original version of this story was published in the Daily Business Review
During the past year, we have seen an acceleration of both large and small businesses relocating to Florida. Reasons for this relocation often include the economy and physical climate. However, perhaps the most important reason for corporate relocation to Florida is to reduce taxes.
The question is: can an out-of-state business owner literally and legally change the “domicile” and location of their business to Florida? And if so, how?
Since not all states allow for redomesticating an LLC, this article outlines how to “convert” a California limited liability company (the California LLC) to a Florida limited liability company (the Florida LLC), referred to as the LLC conversion.
The LLC conversion is a purely hypothetical transaction and is presented solely for illustrative purposes. Every conversion in each state is different, so it’s critical to retain corporate counsel to guide you through the conversion process, as well as the legal consequence and potential tax ramifications of the conversion. Only 17 states allow for such a conversion and most states describe this process as redomestication or redomiciling. Florida, however, classifies these transactions as conversions only.
What Is a Conversion?
“Conversion” is the process whereby a business changes its domicile from one state to another and relocates to the new state. The converted business then becomes subject to the laws of its new domicile as if it had been originally formed, from inception, in that state.
Florida law allows a California LLC to redomicile through conversion, whereby the governing law becomes Florida.
Conversion step 1: do both the old and new LLC domiciles permit conversion?
One of the most important caveats regarding conversion is that its availability varies from state-to-state and by business type. Many states permit conversion of some companies, subject to certain conditions. Other states prohibit conversion entirely for all businesses, regardless of type.
Generally, there are two threshold, fundamental considerations that must be resolved to proceed with an LLC Conversion: does the state where your company was originally formed permit a company to convert to another domicile? does the destination state allow conversion? If the answer to either of these questions is “no,” then conversion is off the table, and the parties must implement a back-up plan.
The Florida Revised Limited Liability Company Act (FL LLC Act) and the California Revised Uniform Limited Liability Company Act (CA LLC Act) permit conversion and have been in existence for the past eight years.
Section 605.1041(3) of the FL LLC Act permits an out-of-state LLC to convert into a Florida LLC if the other state’s law authorizes the conversion. Section 17710.02(a) of the California LLC Act authorizes conversions and redomiciling CA LLCs to other states if certain conditions are satisfied, one of which being that the new domicile’s law authorizes the conversion.
Many states, including New York, do not allow a company to abandon its state domicile merely so that it can redomicile elsewhere. A New York limited partnership may be converted into a New York LLC, and a New York LLC can convert into a New York corporation. However, no New York LLC can redomicile out of New York and into another state. In those circumstances, the company may either remain in that state and register as a foreign entity doing business in Florida, or dissolve and reincorporate in Florida or merge into a Florida company.
Conversion step 2: prepare plan of conversion
California and Florida each require different documents for the LLC Conversion, but share one common, indispensable document: the plan of conversion.
Both Sections 17710.03(a) and 17710.06 of the CA LLC Act specifically require the converting CA LLC to adopt and prove a plan of conversion containing certain information specified in the statute. Florida’s “mandate” for a plan of conversion is equally clear in Section 605.1042(1) of the Florida LLC Act. Florida’s LLC Act itemizes the specific content required for the plan of action.
Section 605.1041(3) of the Florida LLC Act—which authorizes the LLC Conversion in the first place—requires the converting LLC to comply with certain provisions of the Florida LLC Act applicable to “foreign entities.” The Florida LLC Act defines a foreign entity as “a [United States] entity whose jurisdiction of formation is a jurisdiction other than this state and is denominated as a limited liability company.” Since the CA LLC was formed in California, it qualifies as a foreign entity under the act. Florida distinguishes a foreign entity” from a non-U.S. entity, which is subject to domestication rather than conversion.
Each plan of conversion is a private, internal company document and may be subject to subpoena. The plan should not be filed (nor should it otherwise be made publicly available). To avoid duplicating work, the LLC can prepare a single, comprehensive plan of conversion that satisfies both Florida’s and California’s requirements.
Conversion step 3: prepare and file articles of conversion; LLC conversion formalities
After all the California LLC’s members approve and sign the plan of conversion, it must prepare and file with Florida’s Department of State “Articles of Conversion for ‘Other Business Entity’ into Florida Limited Company” (articles of conversion). Florida’s Articles of Conversion incorporate Articles of Organization for the new Florida LLC. Consequently, some of the details of the Florida LLC must be determined ahead of time, such as the identities and addresses of the Florida LLC’s managers and its authorized members. Each member of each LLC must sign the plan of conversion for that LLC, as well as the unanimous member consent approving the conversion and plan of conversion. The articles of conversion, including the articles of organization, are publicly filed and available. Counsel should review and redact any confidential information from the articles of conversion prior to public filing.
Conversion step 4: prepare and file certificate of conversion
Finally, once the conversion has been completed in Florida, the California LLC must file a “Certificate of Conversion” with California’s Secretary of State pursuant to the CA LLC Act. This form can be retrieved from: https://bpd.cdn.sos.ca.gov/corp/pdf/obeconv.pdf.
Benefits of Conversion
Through the conversion, the “new” Florida LLC may keep, maintain and use the same bank accounts, established federal tax ID number and form, credit rating and previous business relationships as the California LLC.
In fact, a business owner may decline to get a new federal tax ID number, and avoid forming a new company in Florida and then merging an old company into a new Florida company with a different federal tax ID number. Conversions avoid having to become requalified as a vendor and obtaining a new vendor number by allowing for the “new” Florida LLC to keep its original federal tax identification number.
The other benefits and legal consequences of the LLC conversion are codified in Section 605.1046 of the Florida statutes, including:
- Converting a California LLC into a Florida LLC is a seamless process. After the conversion, the Florida LLC is governed by Florida law, without any interruption to business operations or Florida LLC existence. The Florida LLC is still the same as the California LLC; only the governing law applicable to the LLC changes.
- California LLC property and assets remains LLC property and assets after the conversion. All property of the California LLC continues to be vested in the Florida LLC.
- There is no need to create deeds or other documents transferring property from the California LLC to the Florida LLC or vice-versa.
- The California LLC debts remain the Florida LLC debts. All debts, obligations and other liabilities of the California LLC continue as debts, obligations and other liabilities of the Florida LLC.
- The Florida LLC owes what it owed before the conversion, and the California LLC’s creditors have the same rights against the Florida LLC that they had before the conversion.
- California’s LLC powers are the Florida LLC’s powers. Unless the plan of conversion provides otherwise, the rights, privileges, immunities, powers and purposes of the California LLC remain in the Florida LLC.
- Members of the California LLC remain members of the Florida LLC. Upon closing the conversion, the membership and percentage interests of each member in the California LLC are automatically converted into an equivalent membership and percentage interest in the Florida LLC.
- The Florida LLC replaces the California LLC in legal proceedings. The name of the Florida LLC may be substituted for the name of California LLC in any pending legal action or proceeding.
- Florida LLC governing documents become effective. The Florida LLC’s organic rules—basically its Articles of Organization and Operating Agreement—remain in full force and effect without modification.
- Taken together, these changes allow the Florida LLC to make significant legal changes without disrupting its day-to-day business operations.
- The plan of operation for the Florida LLC is reasonably necessary to protect the Florida LLC’s business and commercial rights and those of its members.
- A conversion does not require the California LLC to wind up its affairs and does not constitute or cause dissolution of the California LLC.
Compared to forming a new LLC and winding down the old LLC, LLC Conversion provides a more seamless process that minimizes disruption of LLC business operations.
So, if you decide to make the move to Florida and own an LLC elsewhere, determine if your current state will allow for a conversion to Florida so you can take advantage of the physical and overall favorable commercial climate.
In the interim, should you have any questions, please contact us at 954-384-6114 or e-mail us at contactus@oppenheimlaw.com.
Roy Oppenheim of Oppenheim Law has been representing corporate and commercial real estate clients in South Florida for over three decades. A graduate of Princeton University and Northwestern University Pritzker School of Law, Roy is a member of the Florida and New York Bars, has authored numerous law review articles and founded the SouthFloridalawBlog.com.
Reposted from: https://www.oppenheimlaw.com/news-resources/when-moving-to-florida-dont-forget-to-take-your-company-with-you/
