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Effect of Statutory Conversion of California Corporate Forms

For various good business reasons, it is not uncommon for businesses to seek to shift their corporate forms. As an example, a business owner might start out as a limited liability company (“LLC”) but want to convert the LLC into a corporation (or vice versa). California law allows an easy method of conversion under Cal. Corp. Code, § 1150 et seq. An experienced corporate attorney can help with the process and explain the advantages of each corporate form for your business. Here is a quick rundown on the process and legal effect of conversion.

What is the Legal Effect of Conversion?

As described in the federal court’s opinion in Brinkley v. Monterey Financial Services, Inc., Case No. 16-CV-1103-WQH (WVG) (US S.D. Cal. July 30, 2018), the legal effect of conversion is two-fold. First, the statutory conversion automatically causes the old corporate entity to cease existing. Second, the conversion causes the immediate transfer of all legal rights, assets, and liabilities from the old entity to the newly-formed corporate entity. Specifically, the following transfers from the old to the new:

  • All real and personal rights and property, § 1158(b)(1)
  • All debts, liabilities, and obligations, § 1158(b)(2)
  • All rights and liens of creditors and lienholders, § 1158(b)(3)

The Brinkley case involved a conversion from an LLC to a corporation; but the same principles apply to a conversion from an LLC to a corporation. Conversions from and to other corporate forms can be accomplished. You can find more information on our website, here.

What is the Conversion Process?

As described in the Brinkley case, a corporate entity seeking conversion must complete the correct statement of conversion and must file the statement with the California Secretary of State. Once filed — along with the filing fee — the previous corporate entity ceases to exist and the new form comes into existence. As the Brinkley case demonstrates, the new entity is the old entity and steps into its shoes. If, for example, the old entity is involved in litigation, the new entity becomes the party involved in the litigation. This is what happened in the Brinkley case. The original defendant in the case was Monterey Financial Services, Inc. While the case was pending, the corporation filed for conversion into an LLC becoming Monterey Financial Services, LLC. The new Monterey automatically became the party involved in the case, if it is found liable, the new Monterey will be liable even if the events resulting in liability were done by the old Monterey.

Contact San Diego Corporate Law Today

For more information on this topic and other aspects of corporate structuring and/or conversions, contact attorney Michael Leonard, Esq., of San Diego Corporate Law. Mr. Leonard provides a full panoply of legal services for businesses including formation and annual maintenance of corporate entities of all types. Mr. Leonard can be reached at (858) 483-9200 or via email.

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