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Merger v. Conversion: Out with the old, in with the new

Until recently, Maryland was one of a handful of states whose law did not allow business entities to convert from one entity form to another. In addition, the law did not provide generally for the conversion of a foreign entity to a Maryland entity.  In the 2013 Maryland Legislative Session, a bill was passed by both the House and Senate that will change Maryland’s law on this subject. Now awaiting the Governor’s signature, the Maryland Conversion Bill, HB 1140, will place Maryland among the majority of jurisdictions allowing for conversion of business entities.

Prior to this Bill, if a Maryland corporation wanted to become a limited liability company (“LLC”), the only option was for the corporation to participate in a merger.  Mergers require multiple steps and can be somewhat complicated. In the specific example of a corporation that wants to become an LLC, the LLC entity must first be created, a resolution of merger must be adopted, approvals from stockholders and members are needed, and articles of merger must be filed with the Maryland Department of Assessment and Taxation. The corporation then must complete transfers of all assets and debts to the LLC entity. What may be most significant, however, are the tax consequences associated with the merger process.  The corporation would be taxed, as well as the shareholders personally for distributions, as the merger is in effect, the liquidation of the merging entity.   

Maryland’s new Bill addresses conversions of corporations, limited liability companies, real estate investment trusts, partnerships, limited partnerships, and statutory trusts. Each entity has its own section which specifically addresses the steps required for that entity’s conversion.  In each instance, Articles of Conversion need to be filed with the State Department of Assessment and Taxation containing specific information, which varies depending on the type of entity conversation.  The bill addresses conversions of foreign entities into Maryland entities, and vice versa. Under this bill, the newly converted entity is considered to be the same entity as the original converting entity.  The practical effect of the conversion means the assets will automatically vest in the converted entity without any additional steps, as will the debts and liabilities of the converting entity. Creditors’ rights, including liens, will remain unchanged, and ownership interests will continue to exist as ownership interests or shares of stock in the newly converted entity depending on the form.

The effective date of this bill, once signed into law, is October 1, 2013.

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