Feb. 15, 2023 –Imagine yourself as the owner of a startup business, which was formed as a Wisconsin limited liability company (LLC), and you are in need of a capital infusion to grow your business.
After months of presentations to various private equity firms, you receive a term sheet outlining the conditions upon which this group will invest in your business. Buried within said term sheet is a requirement that you must become a Delaware LLC.
What do you do? The answer is more straightforward than you might think.
On April 15, 2022, Gov. Tony Evers signed 2021 Wisconsin Act 258 into law, which repealed the prior Wisconsin Limited Liability Company Act and adopted, with some modifications, the Revised Uniform Limited Liability Company Act created by the Uniform Laws Commission (Revised Act).
The Revised Act, which became effective as of Jan. 1, 2023, is codified at Wis. Stat. Chapter 183 (which is the same chapter where the prior LLC law was codified).
Among the various changes contained in the Revised Act is a change and expansion of the definition of “domestication.”
Under the prior law, domestication referred to a change of domicile to or from Wisconsin by an LLC and was classified as a “conversion” in the same manner as a conversion from the LLC form to another type of entity form (such as a corporation).
The Revised Act defines “domestication” as a transaction whereby an LLC can be simultaneously governed both by Wisconsin law and the law applicable to a non-U.S. entity. These new expanded domestication provisions are based upon similar provisions contained in Delaware’s General Corporation Law.
Reasons for a Change of Entity Domicile
While conversion or domestication of an entity might seem to be a rare occurrence, there are several business reasons motivating such a change.
For example, take the situation of a startup entity seeking a significant capital infusion. Venture capital and private equity firms commonly require any entity in which they are investing to be situated in Delaware and governed by Delaware law so as to subject the entity to the jurisdiction of the Delaware Court of Chancery and/or to give management more deference in decision making. Additionally, if the business owner(s) relocate from Wisconsin to another state (or vice versa), a conversion may be necessary to remove contacts with the prior jurisdiction. Other reasons justifying a change of domicile could be a desire to achieve a more favorable tax treatment for the business entity, or a desire to participate in a state grant or incentive program only available to a domestic entity. These objectives can be accomplished via a conversion or domestication, as applicable.
Mechanics of Conversion
Once the decision has been made to change the entity’s domicile, the mechanics of conversion are similar to the process for a merger or dissolution.
Whether the conversion involves a foreign (i.e., non-Wisconsin) LLC converting to a domestic (i.e., Wisconsin) LLC, or vice versa, the conversion process begins with the adoption of a plan of conversion, under Wis Stat. section 183.1041.
The plan of conversion, under Wis. Stat. section 183.1042(1), must be in a record and contain all of the following:
(a) The name, type of entity, and governing law of the converting entity. If the converting entity is a foreign LLC which is changing its domicile to Wisconsin, then the governing law would be the LLC statute for the state in which the foreign LLC is organized prior to the conversion.
(b) The name, type of entity, and governing law of the converted entity. If the entity intends to utilize its same name as prior to the conversion, this name will appear but would now be referenced as a Wisconsin LLC and Chapter 183 would be cited as the governing law.
With respect to the name of the converted entity, be sure to check as to the availability of the proposed name prior to preparing the plan of conversion, as it may be the case that the foreign LLC’s name is already taken in Wisconsin (or vice versa), and thus the converted LLC will need to select a new name.
(c) The terms and conditions of the conversion. With respect to a change of domicile, a recitation that the rights and obligations of the members remain the same should be sufficient.
(d) The manner and basis of converting the interests in the converting entity into interests, securities, or obligations of the surviving entity, rights to acquire such interests or securities, money, other property, or any combination of the foregoing. Again, with respect to a change of domicile, this would typically be stated as a 1-to-1 conversion of interests in the converted entity; i.e., the members will hold the same percentages before and after the domicile change.
(e) The organizational documents of the converted entity that are to be in a record immediately after the conversion becomes effective. Oftentimes, the existing LLC documents (Articles of Organization and Operating Agreement) remain unchanged in the domicile change. If, however, any of these documents are to be amended or restated, those updated documents should be included in the plan.
(f) Any other matters required by the governing law of the converting entity.
A plan of conversion may contain any other provision relating to the conversion and not prohibited by law, under Wis. Stat. section 183.1042(2).
Under Wis. Stat. section 183.1043(1), the plan of conversion must be approved by all of the members of a domestic LLC and in the manner specified by the governing law of the foreign LLC. This can be accomplished with written resolutions signed by the members (or the managers or board of governors, if the governing law of the converting entity provides as such) of the converting entity, with the plan of conversion attached as an exhibit to the resolutions.
After the converting entity has approved a plan of conversion, Articles of Conversion must be filed with the Wisconsin Department of Financial Institutions (DFI).
DFI provides Form 1000, Articles of Conversion, which satisfies the statutory requirements. If Articles of Conversion are not filed, then the change of domicile will not be recognized regardless of whether the other steps have been followed.
Note that the conversion process could also be used to convert a domestic entity to another type of domestic entity, such as an LLC to a corporation or vice versa.
However, with respect to an LLC to corporation conversion, it is much easier to simply elect a change in tax classification than to proceed with a statutory conversion under Chapter 183.
Effect of Conversion of Domicile
When a conversion becomes effective, the LLC continues its existence and is the same entity that existed before the conversion, except that it is no longer subject to the governing law that applied prior to the conversion and is subject to the governing law of the new domicile.
It should be noted that, except as otherwise provided in the articles and plan of conversion, if the converting entity is subject to dissolution under its governing law, the conversion does not dissolve the converting entity for the purposes of its governing law.
Thus, the entity can elect to qualify as a foreign entity under the law of the prior jurisdiction or to dissolve the entity in that jurisdiction.
The domestication provisions of the Revised Act are new, and essentially allow an LLC to be governed in part by the Revised Act as well as the law of the LLC’s current jurisdiction. These provisions have not been adopted by all of the states that have adopted the Revised Uniform Limited Liability Company Act (Revised Act). Minnesota, for example, adopted the Revised Act in 2015 without including such provisions.
Under section 183.1051, a domestic LLC may domesticate as a non-U.S. entity subject to non-U.S. governing law while continuing to be a domestic LLC, and a non-U.S. entity may domesticate as a domestic LLC subject to the Revised Act while continuing to be an entity subject to its non-U.S. governing law, pursuant to sections 183.1051 to 183.1055 of the Act and a plan of domestication.
The domestication must be permitted under the governing law of the domesticating entity and permitted under the governing law of the domesticated entity.
More favorable tax treatment would likely be the reason why an entity would seek this type of dual/split governance.
Under section 183.1052, the plan of domestication must contain similar provisions as the plan of conversion. The plan must also be approved by all of the members of a domestic LLC and in accordance with the laws governing the non-U.S. entity, under section 183.1053. Articles of Domestication must be filed with DFI, and Form 1500 can be used to meet this statutory requirement.
A completed domestication has the same effect as a conversion in many respects, with one notable exception. In contrast to a conversion, upon the filing of articles of domestication, the domesticating entity becomes a domestic entity under Wisconsin law, while continuing to be a domestic organization under and subject to the governing law of the domesticating entity.
Under the right circumstances, the conversion and domestication provisions of the Revised Act can be powerful tools for practitioners to efficiently and expeditiously position a client’s business entity for a significant transaction, more favorable tax treatment, or to strengthen management’s position.
The NLRD has approximately 6,800 members across the U.S. Find them through the NLRD Directory.