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Converting your Texas LLC to a corporation can be a strategic move, especially if you are seeking outside investment, planning to issue stock, or preparing for a public offering. Texas law allows for a statutory conversion, a streamlined legal process that can change your LLC’s entity type without dissolving it. This guide from the Austin business law lawyers at the Kumar Law Firm PLLC outlines the key legal steps and compliance requirements that may be involved in converting a Texas LLC to a corporation.
Why Convert Your LLC to a Corporation in Texas?
What Are the Business Reasons for Converting?
Many Texas business owners choose to convert their LLCs to corporations to attract venture capital, issue stock, or prepare for an initial public offering (IPO). Corporations offer a more formal structure that often appeals to institutional investors and can help facilitate equity-based compensation plans.
Why Does Austin’s Business Climate Favor Corporations?
Austin’s dynamic startup and tech ecosystem often favors corporate structures. While limited liability companies may be great vehicles for permitting flexibility in a startup, investors in this region may prefer to participate in funding for a corporation. If you are scaling a business in Austin, converting your LLC may help you access new capital sources and align with investor expectations.
What Are the Pros and Cons?
Corporations offer benefits like the ability to issue stock and easier ability for passive investors who do not participate in day-to-day operations that other entity types may not offer. However, corporations also come with stricter governance requirements and potential double taxation unless a business owner elects S-corporation status, which may not be an option in every circumstance. A business owner should carefully weigh these trade-offs before proceeding with a conversion.
How to Convert a Texas LLC to a Texas Corporation: Step-by-Step
Step 1 – Prepare the Required Legal Documents
You will need to begin by drafting a Certificate of Conversion, a Plan of Conversion, and a Certificate of Formation for the new corporation. You will also need to prepare corporate bylaws and appoint initial directors to establish governance immediately after filing. These documents must comply with the requirements set forth in the Texas Business Organizations Code.
Step 2 – File with the Texas Secretary of State
You must generally submit both the Certificate of Conversion and the Certificate of Formation to the Texas Secretary of State. You may also need to submit a Plan of Conversion if it separate from the Certificates. The Texas Secretary of State filing fee is $300 for each document, totaling $600. Processing typically takes 1 to 2 weeks, depending on the filing volume at the Secretary of State Office.
Step 3 – Complete Post-Filing Compliance Tasks
Once the conversion is approved, business owners will likely need to notify their bank, vendors, and licensing agencies of the new corporate structure. They may also consider reviewing and amending contracts, insurance policies, and business licenses to reflect the change in entity type.
What Legal Authority Governs This Process?
Statutory conversions in Texas are governed by Chapter 10 of the Texas Business Organizations Code. This legal framework allows you to convert your Texas LLC to a Texas corporation without dissolving the original entity, making the transition more efficient and preserving business continuity.
What About an Out-of-State LLC?
Converting an out-of-state LLC (such as an LLC formed in the state of New York or California) to a Texas corporation is a separate process that depends on the governing laws not only of the state of Texas, but also the laws of the state the LLC is currently organized in. Contact an attorney at the Kumar Law Firm PLLC today if you are interested in discussing converting your out-of-state LLC to a Texas corporation.
Common Misconceptions About Converting an LLC to a Corporation
Some business owners mistakenly believe that conversion is merely a name change. In reality, it is a legal transformation that creates a new entity type. Additionally, LLC documents, such as an operating agreement, do not automatically convert into corporate governance documents. You generally will need to draft new bylaws and establish a board of directors for the resulting corporation. Finally, conversion affects more than paperwork; business owners will often need to update contracts, licenses, and banking arrangements to reflect the new corporate identity.
Is Converting Right for Your Austin-Based Business?
Before converting, consider your long-term business goals. Are you seeking outside investment or planning to scale? If you are operating in Austin’s tech or startup sector and are looking to scale, a corporate structure may better support the business’s growth. However, corporations require more formal governance and regulatory compliance. If your needs change later, Texas law also allows for a reverse conversion from a corporation back to an LLC, giving you flexibility as your business evolves.
Consult an Austin Business Attorney Before You Convert
Converting your LLC to a corporation is a strategic decision that can unlock new opportunities, but it also involves legal and other complexities. The Kumar Law Firm PLLC in Austin helps Texas business owners navigate entity conversions with clarity and confidence. Contact us today to schedule a consultation and ensure your transition is legally sound and aligned with your business goals.