How Do I Change an Existing Partnership to an LLC?

By Larissa Bodniowycz, J.D.

How Do I Change an Existing Partnership to an LLC?

By Larissa Bodniowycz, J.D.

Evolution is the nature of businesses. Sometimes that evolution requires a change in the form the business takes. For a variety of reasons, a business might start as a partnership but later wish to change to an LLC. This type of change in the form of a business, called conversion, is possible, and owners can achieve it in more than one way.

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Methods of Conversion

There are two different methods for converting a partnership to an LLC. The first is to form a new LLC, dissolve the partnership, and transfer all the partnerships assets and liabilities to the new LLC. The second method, available in many states, is to file a form with the state agency in charge of business entities that converts the partnership into an LLC. This method, called statutory conversion, is governed by state statute.

Conversion by Formation and Termination

Formation and termination is the traditional approach. To convert your business, you should form a new LLC by submitting articles of organization and the required fee to the agency that regulates businesses, usually the Secretary of State, in the state where the business operates.

Transfer all of the partnership's assets and liabilities, including nontangible assets such as intellectual property, to the new LLC. Draft a written agreement to make the transfer; otherwise, a dispute could arise in the future about whether all of the partnership's assets transferred to the LLC. After you have completed these steps, you can dissolve the partnership.

This approach is typically the most time-consuming and expensive approach, particularly if the business has operated for a long time. However, sometimes it is the only option available.

Statutory Conversion

Converting business forms is so common that many states have adopted statutes that set out an easier mechanism for converting one business form into another. The exact process varies by state, but statutory conversion generally involves three steps.

  1. Approve the conversion and formalize the approval in a plan of conversion that sets out how and when the conversion will take place.
  2. Fill out and submit the appropriate state form, often called a certificate of conversion, to the business's home state.
  3. Submit the articles of organization and required filing fee with the business's home state.

Because statutory conversion is relatively new, the details of the process vary. For example, some states require owners to file the certificate of conversion or plan of conversion at the same time as the articles or organization. Due to this variation, it is very important to follow the instructions for conversion for the state where the business operates.

After Conversion

After the conversion process is complete, it is very important to operate only under the name of the LLC to avoid inadvertently resurrecting the old partnership and creating a legal headache. Transfer all bank accounts, permits, and contracts that belonged to the partnership into the name of the LLC. Terminate those that you cannot transfer and any that simply do not make sense to transfer.

Once a partnership has operated successfully for some time, the owners might feel compelled to convert their business type to one that provides more liability protection. A partnership can convert to an LLC in two different ways: by termination of the partnership and formation of the LLC or by filling out and submitting a form made applicable by state law. Understanding both methods will make it easier to determine which route to take.

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