What is reincorporation?
How do you reincorporate a company into another legal entity?
Why should you consider reincorporating?
We will look at what is reincorporation, look at its legal definition, what it entails to convert a company from one jurisdiction to another, why should you make a statutory conversion, why some reincorporate to become a Delaware corporation, what are the steps, considerations and more.
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What is reincorporation
In business terms, reincorporation or statutory conversion is when a corporation is moved from one jurisdiction to another or from one type of entity to another.
To move one entity to another or to change an entity type to another, there are many ways you can achieve this goal, such as:
- Converting an entity to another
- Merging the entity with another
- Doing a reverse merger with another
- Transferring a company’s assets to another
- Liquidate and reincorporation
“Reincorporation” can be to change a company’s legal status from one entity to another like a “corporation”.
For instance, an LLC reincorporating into a corporation.
You can also reincorporate a business within the United States or you may want to reincorporate a company in a foreign jurisdiction.
This is to move the company’s registration from one jurisdiction to another.
It can be done nationally or internationally.
Here is an example of an international reincorporation:
Many corporations wanting to operate in the Asian market may have incorporated in Hong Kong representing a relatively safe jurisdiction with corporate laws similar to that of the Western world.
However, should the legal, economic or political landscape change exposing the company to unwanted risk, companies incorporated in Hong Kong may decide to reincorporate in another jurisdiction such as Singapore, UK or other jurisdictions to mitigate risk.
Reincorporate definition
According to the Merriam-Webster dictionary, reincorporate, reincorporated, reincorporation and reincorporating are all defined as:
“To form or cause (something or someone) to form a corporation again” or “to blend or combine again”
What is notable with this reincorporation definition is that it is a process where a corporation is formed again or combined into another.
Why reincorporate an entity
Typically, startups may want to move their corporation from one state to another to satisfy certain conditions imposed by investors or venture capitalists.
In other words, to get financing, they must reincorporate.
For example:
A venture capitalist may agree to invest in a startup provided that the company is moved from Florida to Delaware.
Here some reasons why a business may consider reincorporation as a strategic option:
- You incorporated in a state to then realize it’s not great for your products or services
- You are operating a business as an LLC but determine that reincorporating into a C corporation is best
- You have a corporation but determine that a personal service corporation is best
- You are restructuring your business and your corporation must move to another state for regulatory reasons
- Reincorporating will allow you to take advantage of certain tax benefits or tax efficiencies
- You are looking to merge various business entities into one to rationalize your organizational structure
- An investor or VC agrees to invest in your business provided that you reincorporate in Delaware
How to reincorporate an entity
You can reincorporate a business in many ways:
- Converting an entity to another
- Merging the entity with another
- Doing a reverse merger with another
- Transferring a company’s assets to another
- Liquidation and reincorporation
Conversion
Conversion, redomestication or redomiciliation is a process where a business is converted into another form within the applicable state.
Redomiciliation can also be used to convert a foreign entity into a local or domestic entity allowing the company to transfer its registration from one state to another.
For the conversion process to work, the laws applicable to the existing business entity and that of the new jurisdiction must accept the conversion.
For instance, California laws do not accept or recognize the conversion of legal entities.
For example:
A foreign corporation registered in Delaware can convert into a Delaware corporation in accordance with Section 265 of the Delaware General Corporation Law.
A Delaware LLC can convert into a Delaware corporation in accordance with the Delaware General Corporation Law.
Merger
Corporations can be reincorporated using the merger mechanism.
This is the process where two business entities are combined into one new entity in the desired state and in the desired form.
For example:
A Maryland corporation and a Florida corporation merge to become a new Delaware corporation.
Reverse merger
Reincorporating a business can be achieved by incorporating the new entity in the desired jurisdiction and merging the existing entity into the newly created one.
This is referred to as a reverse merger transaction.
For example:
You incorporate a new company in Delaware and then merge it with an existing Texas company.
The Texas company is liquidated and the new Delaware company will be the only surviving business entity.
Asset transfer
The sale of assets, purchase of assets or asset transfer is a process where a newly incorporated company in the desired state and desired form will acquire the assets of the existing corporation.
Once the existing company assets and liabilities are fully transferred, you will then dissolve the initial business entity.
For example:
You incorporate a new company in California and have an existing Nevada company sell all its assets (or transfer) all its assets to the newly formed California corporation.
Liquidation and reincorporation
Another way for a company to reincorporate is to register a new business entity in the new state and then liquidate or dissolve the initial entity.
For example:
A Florida LLC may decide to liquidate the business and perform a reincorporation in Delaware.
Steps to reincorporating a company
You’ve decided to reincorporate your business by moving it from one state to another, what are the procedural steps to make that happen?
For the sake of our explanation, let’s assume that you want to reincorporate a California corporation into Delaware to better attract institutional investors.
Here are the steps.
First, you need to make sure that your existing California entity’s information, registration and business records are up to date.
You want to ensure that you have an accurate and representative picture of the legal obligations applicable to your California entity so you can make the right decisions.
Second, you need to have the board of directors of the existing California entity approve the reincorporation by adopting a resolution to this effect.
Then, you’ll need a reincorporation agreement whereby the shareholders of the company also approve the reincorporation process and accept that the existing California entity will be eventually dissolved once it is reincorporated in Delaware.
The directors of the California entity incorporate a corporation in Delaware.
The California entity’s directors and officers are named as the Delaware entity’s directors and officers.
The shareholders of the California company become shareholders of the new entity in Delaware.
The California entity assigns and transfers all its assets and liabilities to the newly formed Delaware corporation.
The officers of the California corporation dissolve the business entity in California.
Reincorporation considerations
To determine whether you can reincorporate your business into another business entity or move it from one state to another, you must do your homework to ensure you comply with the law or any other legal obligation.
Statutes applicable to the existing company
As the first line of attack, you should consider the laws applicable to your current business entity to determine the legal obligations you may need to comply with in converting your business into another.
Statutes applicable to the new company
Then, you must consider the statutes of the state in which you are looking to incorporate to ensure they allow for a conversion mechanism or another vehicle to reincorporate your business.
Corporate law
In addition, you must make sure you comply with the corporate laws applicable to the desired transaction.
As such, you must comply with your company’s articles of incorporation, bylaws, operating agreement or other.
For example:
In some states, like California, converting an LLC requires a plan of conversion approved by the majority of the LLC members or more if the operating agreement requires a higher rate of approval.
Business structure
The complexity of your existing business structure can provide you with more or less flexibility in your reincorporation process.
The simpler your business structure, the easier your reincorporation process will be.
The more complex your business structure, the more careful you must be in selecting the right reincorporation vehicle or path to achieve your goal without exposing your business or making it an administrative burden.
Reincorporation FAQ
What is the legal definition of reincorporation
The legal definition of reincorporation is the process of moving one legal entity from one jurisdiction to another or to convert one business entity form into another.
For example:
A Florida corporate moves its registration to Nevada (this is called reincorporation, redomiciliation or redomestication)
A Delaware LLC converts into a Delaware C corporation (this is when the legal entity form is changed)
What is the benefit to reincorporate company
Here are the benefits of reincorporating a company:
- Move to a jurisdiction that is best for your products and services
- Take advantage of regulatory and compliance rules applicable in another state
- Achieve tax advantages or benefit from tax breaks
- Restructure your organizational structure
- Make your company attractive for funding and financing
Why reincorporate company
There may be many reasons why you choose to reincorporate a business.
Probably the main reasons why small companies and startups reincorporate is to attract investors or comply with investment conditions.
VC’s and investors may prefer to invest in business entities incorporated in Delaware.
As a result, if you have a corporation or business entity registered outside of Delaware, they may want you to move the business to Delaware as they are:
- Familiar with the Delaware laws
- Their investment portfolio is primarily composed of Delaware corporations and they want to remain consistent with their investment strategy
- They may have preferential tax treatment under Delaware laws
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