So, you want to convert your New Jersey LLC into a for-profit corporation? The first thing you should know is that conversions are always subjective, varying highly depending on the particulars of your situation. The process can be quite complicated, and the consequences of handling a merger or conversion improperly can be devastating, meaning that hiring a tax consultant or business attorney is highly advisable.
The Difference Between a Merger and a Conversion
There are generally two ways to convert an LLC into a corporation, a statutory conversion or a merger. A statutory conversion does not require you to create a separate corporation prior to converting, meaning it is often much cheaper and simpler.
However, 15 states, including New Jersey, do not allow statutory conversion of LLCs. Instead, business owners are required to do a statutory merger; a much more complicated process.
Planning a Statutory Merger in New Jersey
Mergers are commonly known as some of the most complex business transactions, and as such require a great deal of planning. Similar to most other states, New Jersey business law contains a couple statutes pertaining to corporations and LLCs. The statutes (Sections 14A: 10-1 to 10-14 and Section 42:2B-20) have portions well worth going over before planning an LLC to corporation merger.
Listed below is a very general outline of how to convert an LLC to a corporation in New Jersey:
- Create a new corporation
- Prepare a plan of merger
- Merger plans, also called an agreement of merger, will usually contain the name of your LLC, the name of the new corporation, terms and conditions of the merger, and a plan for converting LLC membership interest into corporate shares. NJ business law is a little vague on what is required of a plan of merger.
- Get LLC approval
- The merger cannot go through without approval from at least 51 percent of the LLC ownership.
- Get corporation approval
- A majority of the new corporation’s board of directors and shareholders must also agree to the merger.
Once completed, your LLC and everything attached to it will be part of your new corporation. This means that everything, even debts associated with the LLC will belong to the corporation. Make sure that every detail is scrutinized when planning a merger to avoid tax and legal repercussions.