Authored by Bryan Springmeyer Bryan Springmeyer is a California corporate attorney who represents startup companies. The information on this page should not be construed as legal advice.

Tweet

Reincorporating California and Other LLC/Corporations to Delaware Corporations

Startups that are not already formed as Delaware C-Corps often look at reincorporating as a Delaware C-Corp in preparation of taking on investment. VC investors typically require a Delaware corporation to be the investment vehicle because of the VC's familiarity and preference of Delaware corporate law, and require the Delaware corporation to be a C-Corp because of certain preferred tax treatment for the investors.

“Reincorporation” is simply a descriptive term referring to a range of transactions whereby a company is moved from one state to another and/or changed from one entity type (typically an LLC) to a corporation. The actual transaction used to accomplish the reincorporation may be a conversion, reverse merger, transfer of assets, or a variety of other reorganizations.

Conversions

Conversions are statutory mechanisms that states provide to companies that allow them to convert into an entity in the state. For instance, Delaware allows foreign corporations and foreign/Delaware LLCs to convert into a Delaware corporation pursuant to Section 265 of the Delaware General Corporation Law. Apart from the Delaware statutes, the corporate law of the entity's state will also apply to the transaction. California, for example, requires a converting LLC to construct a plan of conversion and have that plan approved by a majority of the LLC voting interest, unless a higher interest is required by the operating agreement. There are other statutory provisions governing the mechanics of the conversion.

Conversions are very simple transactions. They're usually not much more complex than a simple formation. If a conversion is feasible, I often prefer to accomplish reincorporations using this transaction structure.

Reverse Merger

A reverse merger is a transaction where the desired entity type is formed and the existing entity is merged into the new entity. This is usually a more complex transaction than a conversion or asset transfer, so often becomes the fallback if there are reasons why the other types are not feasible or are unappealing. There are a variety of reasons why this reincorporation structure may be used, but in California, the primary one is because there's no conversion statute available for outbound conversions of California corporations.

UPDATE: As of January 1, 2023, California will allow California corporations to convert into corporations of other states, assuming that other state has an inbound conversion statute for corporations. Delaware does, so reincorporations from California corporations to Delaware corporations have become simpler to accomplish.

Asset Transfer

An asset transfer is where a newly formed entity purchases the assets of the former entity.

The difficulty of a reincorporation depends mostly on a few variables:

- Whether there are statutes in both states that provide the statutory mechanics and availability of a conversion
- Who the shareholders/LLC members of the reincorporating entity are. If they are just a few founders who all want to reincorporate, greater flexibility is available. If there are many equity owners and/or not all of them are on board with the reincorporation, greater prudence is required and some of the transaction structures become less favorable.
- The number and types of contracts and vendor accounts the entity has in place. If the company has no important contracts or vendor accounts, it has more flexibility in transaction structure choice.

Related Pages:

Converting a California LLC to a Delaware C-Corp
Where Should I Incorporate? California versus Delaware
Why Startups Incorporate in Delaware
LLC Member Dissenter's Rights in Reorganizations
Minority Shareholder Rights in Oppressive Transactions
Starting/Registering a Delaware Corporation in California