Conversion of Entities in Colorado

• Jurisdiction: Colorado,United States
• Citation: Vol. 33 No. 11 Pg. 11
• Pages: 11
• Publication year: 2004

33 Colo.Law. 11 Colorado Lawyer 2004.

2004, November, Pg. 11. Conversion of Entities in Colorado

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Vol. 33, No. 11, Pg. 11

The Colorado Lawyer
November 2004
Vol. 33, No. 11 [Page 11]

Articles

Conversion of Entities in Colorado
by Beat U. Steiner

Beat U. Steiner is a partner in the Denver law firm of Steiner, Darling & Hutchinson LLP, with a practice concentrating on real estate and general corporate matters - (303) 837-1655; bsteiner@ sdhlaw.com. The author gratefully acknowledges the assistance of John Wilson of Holland &amp Hart LLP with respect to the tax portions of this article However, any errors remain the responsibility of the author

This article discusses some of the practical considerations in converting entities in Colorado. The great advantage of conversion is the ability to accomplish directly and simply what previously could be done only indirectly, either by forming a new entity and transferring assets to it or by forming a new entity and merging the existing entity into it. Changes made in Colorado's entity laws over the last decade provide enormous flexibility, allowing virtually any entity to be converted into an entity of another form.1

Recent legislation2 has consolidated the provisions for the conversion of entities so that all conversions pursuant to Colorado law will take place under CRS §§ 7-90-101 et seq. ("Article 90"),3 rather than the individual so-called "organic statutes" (see boxed acronym key). Such a generic approach is appropriate, but it has some pitfalls that will be explained in this article. Although the conversion provisions apply to cooperatives and limited partnership associations, the discussion of these entities is limited because relatively few of these entities have been formed in Colorado.4

This article first covers conversion mechanics and the legal effects of conversion. The article then discusses tax and business considerations arising in conversions. As will become evident, the conversion of an entity can easily be accomplished, but constitutes a significant business transaction, often having tax consequences and raising many business issues that should be thought through in advance.

Conversion Mechanics

Article 90 provides for the conversion of domestic entities into domestic entities of any other form and foreign entities of any form. It also provides for any foreign entity to be converted into any form of domestic entity. In most conversions, a statement of conversion and constituent filed documents must be delivered to the Colorado Secretary of State for filing. Additional requirements are imposed if a foreign entity is one of the constituent entities in the conversion.

Types of Conversions

Any domestic entity of one form may be converted into a domestic entity of any other form under Article 90. "Domestic entity" is defined as including the following entity forms: domestic corporation, domestic general partnership, domestic cooperative, domestic limited liability company, domestic limited partnership, domestic limited partnership association, domestic nonprofit association, domestic nonprofit corporation, or "any other organization or association" formed under a Colorado statute or common law or "as to which the law of this state governs relations among the owners and between the owners and the organization or association and that is recognized under the law of this state as a separate legal entity."5 The "any other organization or association" catch-all includes such entities as ditch and reservoir companies and other special purpose corporations,6 as well as religious and benevolent organizations.7 Trusts, estates, and sole proprietorships are not "domestic entities" and, thus, cannot be converted under these provisions.8 A joint venture, if there is such a thing that is not a GP,9 can be converted only if it is a GP.

Domestic entities of any form also may be converted into "any form of foreign entity recognized in the jurisdiction under the law of which the entity will be considered to have been formed after the conversion."10 Thus, for example, if the foreign jurisdiction recognizes LLCs, any Colorado entity may be converted into an LLC of that jurisdiction. CRS § 7-90-201(2), as amended by House Bill ("H.B.") 04-1398, does not require that the foreign jurisdiction have a law recognizing the conversion.

Organic Statutes and Acronyms Referred to in this Article.

1931 LP Law Uniform Limited Partnership Law of 1931, CRS §§ 7--61--101 et seq.
Article 90 Colorado Corporations and Associations Act, CRS §§ 7--90-101 et seq.
CBCA Colorado Business Corporation Act, CRS §§ 7--101--101 et seq.
Cooperative Act Colorado Cooperative Act, CRS §§ 7--56--101 et seq.
CUPA Colorado Uniform Partnership Act, CRS §§ 7--64--101 et seq.
LLC Act Colorado Limited Liability Company Act, CRS §§ 7--80--101 et seq.
LP Act Colorado Limited Partnership Act of 1981, CRS §§ 7--64--101 et seq.
LPA Act Colorado Limited Partnership Association Act, CRS §§ 7--63--101 et seq.
Nonprofit Associations Act Uniform Unincorporated Nonprofit Associations Act, CRS §§ 7--30--101 et seq.
Nonprofit Corporation Act Colorado Revised Nonprofit Corporation Act, CRS §§ 7--121--101 et seq.
UPL Uniform Partnership Law, CRS §§ 7--60--101 et seq.

Domestic Entities Referred to in this Article

1931 LPs -Limited partnerships governed by the 1931 LP Law and either the UPL or CUPA, except when otherwise specified
Cooperatives Cooperatives governed by the Cooperative Act
Corporations Corporations governed by the CBCA
GPs General partnerships, whether governed by the UPL or CUPA
LLCs Limited liability companies governed by the LLC Act
LLLPs -Limited liability limited partnerships, whether governed by the 1931 LP Law or the LP Act and whether by the UPL or CUPA, except when otherwise specified
LLPs -Limited liability partnerships, whether governed by the UPL or CUPA, except when otherwise specified
LPs -Limited partnerships governed by the LP Act and either the UPL or CUPA, except when otherwise specified
LPAs Limited partnership associations governed by the LPA Act
Nonprofit Associations Unincorporated nonprofit associations governed by the Nonprofit Association Act
Nonprofit Corporations -Nonprofit corporations governed by the Nonprofit Corporation Act
S Corporations -Corporations governed by the CBCA that have met the requirements for being taxed according to Subchapter S of the IRC

Article 90 Definitions Referred to in this Article

Constituent Document: A constituent-filed document or a constituent-operating document (CRS § 7-90-102(4))

Constituent Entity: With respect to a conversion, the converting entity and the resulting entity (CRS § 7-90-102(5))

Constituent-Filed Document: The articles of incorporation, articles of organization, certificate of limited partnership, articles of association, statement of registration, or other document of similar import filed or recorded by or for an entity in the jurisdiction under the law of which the entity is formed, by which it is formed, or by which the entity obtains its status as an entity or the entity or any or all of its owners obtain the attribute of limited liability. Where a constituent filed document has been amended or restated, "constituent-filed document" means the constituent-filed document as last amended or restated (CRS § 7-90-102(6))

Constituent-Operating Document: Articles of incorporation, operating agreement, or partnership agreement, and bylaws of a corporation, a nonprofit corporation, cooperative, or limited partnership association (CRS § 7-90-102(7))

Converting Entity: The entity that converts into another form of entity pursuant to CRS § 7-90-201 (CRS § 7-90-102(8))

Organic Statutes: With respect to any entity: (1) this article [i.e., Article 90]; (2) the statute, whether of this state or of another jurisdiction, under which the entity is formed; and (3) all other statutes of this state or such other jurisdiction that govern the organization and internal affairs of the entity (CRS § 7-90-102(42))

Owner: A shareholder of a corporation, a member, a partner, or a person having an interest in any other entity that is functionally equivalent to an owner's interest (CRS § 7-90-102(43))

Primary Constituent Documents: Articles of incorporation with respect to a corporation and constituent documents with respect to other entities (CRS § 7-90-102(50))

Resulting Entity: The entity that results from the conversion of an entity pursuant to CRS § 7-90-201 (CRS § 7-90-102(59))

On its face, CRS § 7-90-201(2) provides that a business could successfully convert into a foreign entity by filing the necessary constituent documents for the formation11 of the entity in the foreign jurisdiction and meeting the other Colorado requirements for conversion. However, practitioners should ask to what extent the resulting entity will be recognized under the law of the foreign jurisdiction. Will the entity be recognized for all purposes as being the "same entity,"12 as before the conversion, or just a new entity in the foreign jurisdiction? Will the assets of the converting entity be vested in the foreign resulting entity as the Colorado conversion statute provides? Based solely on the Colorado statute, it would seem difficult to give a legal opinion as to the effect of the conversion on the continuation and the assets and liabilities of the converting Colorado entity under the law of the foreign jurisdiction.

In addition, foreign entities of any form may be converted into domestic entities of the same or any other form.13 This type of conversion is permitted "if the conversion is not prohibited by the constituent documents or organic...