Sometimes, investors prefer a company they are about to invest in to be incorporated in Delaware. There are several advantages and disadvantages to incorporating in Delaware, but there are two primary reasons investors care about. First, Delaware has an extensive, 200 year old body of corporate law that provides predictability in the event that things go wrong. Second, Delaware law grants minority shareholders specific rights involving the sale of a corporation. Investors prefer that second reason because they obviously want their investment to be protected. While there are many other reasons for choosing Delaware for incorporation, they are beyond the scope of this article. If you need more information on Delaware corporate law, start with a Google search or contact a business law attorney in Delaware.
Some North Carolina startups begin their journey to success with creating a limited liability company here in North Carolina. In an effort to attract investors, they may consider converting their North Carolina LLC to a Delaware corporation. While this may seem easy, looking down from 35,000 feet, the devil is in the details. The process of converting a North Carolina LLC to a Delaware corporation involves a good amount of paperwork and several filings that must take place in a specific order.
First, the owner or their attorney must file to create a Delaware corporation. Two forms must be filed simultaneously: (1) Certificate of Conversion from a Limited Liability Company to a Corporation Pursuant to Section 265 of the Delaware General Corporation Law; and (2) Certificate of Incorporation for a Stock Corporation. As of 2017, the filing fee for the Certificate of Conversion is $164.00 and the filing fee for the Certificate of Incorporation is $89.00. Don’t forget to include a cover sheet.
You will want to proactively follow up with the Delaware Secretary of State in regards to your conversion filing. We have had several clients’ filings “get lost in the system.” All we had to do was contact the Secretary of State and ask for a status update – they promptly completed the filings afterwards. We are not sure if this was because conversion is a more complex filing or because the Delaware Secretary of State simply has a massive volume of corporate filings as compared to many other states. Regardless, if you do not hear from the Delaware Secretary of State within a few weeks, give them a call or have your attorney reach out to them.
Once you have successfully filed to create a Delaware corporation, you must wrap things up on the North Carolina side of your company. Again, there are two separate filings you must complete in order to finish the conversion process. First, since your company is no longer a North Carolina limited liability company, you must file Articles of Conversion to a Foreign Entity. The filing fee is $50.00, and you must list Delaware as the state which governs the entity now as well as an address where the North Carolina Secretary of State can continue sending official mail to. Once you file this, your North Carolina limited liability company will be “withdrawn” or “destroyed” per the North Carolina Secretary of State’s records. You can technically stop at this point if your startup does not plan on doing business in North Carolina. However, continue to the final step if you will either be selling products, providing services, or maintaining operations in North Carolina.
The final step of the process is obtaining permission of the North Carolina Secretary of State for your foreign (Delaware) corporation to transact business in North Carolina. This is accomplished by filing an Application for Certificate of Authority, which has a filing fee of $250.00. You need to list a registered agent, which should be an attorney who can receive mail on behalf of your out-of-state corporation. You must also attach a Certificate of Existence from the Delaware Secretary of State. Be sure to obtain this certificate ahead of time as it can take a little while to be delivered. Once you complete this filing, you have officially converted your North Carolina limited liability company into a Delaware Corporation that is authorized to do business within North Carolina.
There are several nuances to this process, so it is not recommended that you try this on your own. Work with a business law attorney in North Carolina who has experience in converting North Carolina companies to Delaware Corporations. Working with an experienced attorney can simplify and streamline this process and eliminate a lot of frustration for you and your potential investors. Call (980) 202-5679 to speak with one of Barber Power Law Group’s experienced business law attorneys about converting your LLC today.