Changing Business Structure in the State of Illinois
One of the most common ways that Enterprise Esquire works with businesses is in the early phases: choosing an entity structure and establishing the business as a legal entity. That’s why we have created resources like our Business Entity Comparison Chart to help new businesses get it right the first time. But, what if the business entity you choose doesn’t end up being right for your business? What if your enterprise has evolved and now it seems a different entity structure is a better fit? What if your company has grown, expanded, or moved to another state? Is it too late? Are you stuck with the choice you made when you first established your business?
In years past, the answer would have been, “it depends.” That’s because Illinois was one of a number of states in the country that did not allow for entity conversion, except in specific circumstances. However, a new law called the Illinois Entity Omnibus Act changes all that. It allows entities to more easily convert from one entity type to another and to change states where the business is domesticated.
What Changed Under the Illinois Entity Omnibus Act?
In July 2018, the Illinois Entity Omnibus Act went into effect. As of that date, Illinois now allows entities to more easily convert from one structure to another and from one state to another. Now, corporations, LLCs, LPs, and any other entity type can convert to another structure or move to a different jurisdiction by following a relatively easy process.
Before we dive into the process, let’s talk about who this law includes and why it matters. Because all entity structures are included, the Illinois Entity Omnibus Act covers corporations, nonprofit organizations, professional service corporations, medical corporations, limited liability companies (LLCs), general partnerships, and limited partnerships (LPs). The reason why this is important is because it allows companies to change legal structure without interruption to its existence. In the past, to change structure, a company would have needed to create a new entity and then merge the old entity and the new, creating disruptions. The process of “conversion” is more smooth and allows the business to continue operating throughout this change in format.
Let’s Walk Through the Two-Step Process
The conversion or domestication process outlined in this law contains two parts: creating a plan and then filing a statement with the state. Because both the process of conversion (changing entity structure) and domestication (changing the state in which the business is located) are similar, we will talk about them at the same time here.
Step One. Create a Plan of Conversion/Domestication.
The planning step in this process is conducted internally within the business. Whether the company’s internal operations are governed by bylaws or an operating agreement, the stakeholders of the business will first need to approve the decision to convert the entity or change domestication. The second step, filing with the State, requires proof of step one, so it is important to record the decision-making process. For example, if the entity is an LLC that is converting to a Corporation, the members of the LLC will first need to vote to change entity status in accordance with the operating agreement. If the operating agreement (or other internal operations document) does not contain a provision for conversion, the new law states that the “merger” provision will suffice.
Step Two. File a Statement of Conversion/Domestication.
After the conversion or domestication has been approved by the members, board, or other stakeholders, the company should then file a Statement of Conversion or Statement of Domestication with the Illinois Secretary of State. This form requires the following information be provided:
○ The name and type of the entity both before and after conversion/domestication
○ The effective date of conversion/domestication
○ A statement that the Plan was approved by the necessary stakeholders
○ A copy of the public document that forms the converted entity (for example, if converting to an LLC, provide a copy of the new Articles of Organization)
Changing Structure or Domestication Should Not Be Done Lightly
Although the conversion and domestication processes have been expanded and streamlined, it is important to consider the tax and business implications of changing structure or domestication. Business owners should always consult with an attorney and a CPA before changing entity structure or domesticating to a different jurisdiction. If you are interested in learning more about how changing structures could impact your business, feel free to schedule a FREE 15 min. consultation with us, so we can get you on the right road to success.