When Your Business Outgrows its Structure
Sometimes the entity you started with isn't the entity you need anymore. Maybe you launched as a sole proprietor and now you're worried about liability. Maybe your LLC worked fine when it was just you, but now you're bringing in investors who want a corporation. Maybe tax laws changed and your current structure is costing you money.
Why Businesses Convert
Changes in ownership, expansion plans, tax considerations, and liability exposure all drive conversions. Investors usually prefer corporations over LLCs because corporations offer different types of stock and more transparent governance structures. Some business owners convert to reduce personal liability or position themselves for better tax treatment. Others convert because they're planning succession or preparing for a sale.
A conversion lets you change your legal structure without having to shut down, liquidate, and start over from scratch.
The Three Ways to Convert
There are three methods recognized in Texas: dissolution and formation, merger, and statutory conversion.
Dissolution and formation is the old school way. You wind up the existing entity, liquidate it, dissolve it, and form a new one. Ownership, assets, and liabilities get transferred through separate agreements. It's time consuming, complicated from a tax standpoint, and rarely the best choice.
Merger involves merging the converting entity into a new converted entity. The old entity ceases to exist and the new entity is formed. Ownership, assets, and liabilities transfer by operation of law.
Statutory conversion is the streamlined approach Texas allows. The entity continues, just in a different form. Assets and liabilities automatically transfer without separate agreements. It's usually the simplest and cleanest method.
The Tax Piece is Critical
Tax consequences can be significant, and they vary from case to case. Converting an LLC taxed as a partnership to a C corporation through a statutory merger is fundamentally different, both in terms of tax consequences and required paperwork, from converting an LLC taxed as a corporation to an S corporation.
This is why you need to talk with a tax advisor before you pull the trigger on a conversion.
Watch Out for Contracts
One thing people forget about is existing contracts. Loan agreements, commercial leases, licenses, and permits all need to be reviewed to make sure they won't be affected by the entity change. Some contracts require consent from the other party if you assign them to a different entity. Failing to get those consents can put you in breach.
We review all existing contracts, leases, and agreements to confirm they remain enforceable after the conversion or to get them properly assigned.
How Conversions Fit into Bigger Plans
Conversions are often part of a larger strategy. They happen in anticipation of new investors, as part of succession planning, before mergers and acquisitions, or as part of estate planning and tax planning. An El Paso business owner might convert their LLC to a corporation to bring in venture capital or convert a sole proprietorship to an LLC to protect personal assets before expanding into New Mexico.
We take a comprehensive approach to make sure the conversion integrates with your broader legal and financial plans.
Conversions Involving Out of State Entities
If you're converting a foreign entity (an entity formed in another state) to a Texas entity, or vice versa, you need to satisfy the statutory requirements of both jurisdictions. Not all states recognize conversions. Some states only allow certain types of conversions. We navigate these requirements for El Paso clients doing business across state lines.
Our Approach
We start by evaluating your current business structure and figuring out why you're considering a conversion. We review liability exposure, ownership arrangements, tax implications, and future growth plans. Based on that analysis, we recommend a conversion strategy that aligns with your goals while remaining compliant with Texas and New Mexico law.
We prepare and file the necessary conversion documents, update governing agreements, and make sure ownership interests are properly reflected in the new entity. We also coordinate with your accountant to address tax issues and make sure nothing falls through the cracks.
Let's Talk
If you're thinking about converting your business structure, contact us or schedule a consultation online. We'll help you figure out whether a conversion makes sense in your case.