conversion of entities in colorado - holland & hart conversion of entities in colorado november...

This article discusses some of the prac-tical considerations in converting entitiesin Colorado. The great advantage of con-version is the ability to accomplish direct-ly and simply what previously could bedone only indirectly, either by forming anew entity and transferring assets to it orby forming a new entity and merging theexisting entity into it. Changes made inColorado’s entity laws over the last decadeprovide enormous flexibility, allowing vir-tually any entity to be converted into anentity of another form.1

Recent legislation2 has consolidated theprovisions for the conversion of entities sothat all conversions pursuant to Coloradolaw will take place under CRS §§ 7-90-101et seq. (“Article 90”),3 rather than the indi-vidual so-called “organic statutes” (seeboxed acronym key). Such a generic ap-proach is appropriate, but it has some pit-falls that will be explained in this article.Although the conversion provisions applyto cooperatives and limited partnershipassociations, the discussion of these enti-ties is limited because relatively few ofthese entities have been formed in Colo-rado.4

This article first covers conversion me-chanics and the legal effects of conversion.The article then discusses tax and busi-ness considerations arising in conversions.As will become evident, the conversion ofan entity can easily be accomplished, butconstitutes a significant business transac-tion, often having tax consequences andraising many business issues that shouldbe thought through in advance.

CONVERSION MECHANICSArticle 90 provides for the conversion of

domestic entities into domestic entities ofany other form and foreign entities of any

form. It also provides for any foreign enti-ty to be converted into any form of domes-tic entity. In most conversions, a state-ment of conversion and constituent fileddocuments must be delivered to the Colo-rado Secretary of State for filing. Addi-tional requirements are imposed if a for-eign entity is one of the constituent enti-ties in the conversion.

Types of ConversionsAny domestic entity of one form may be

converted into a domestic entity of anyother form under Article 90. “Domestic en-tity” is defined as including the followingentity forms:domestic corporation,domes-tic general partnership, domestic coopera-tive, domestic limited liability company,domestic limited partnership, domesticlimited partnership association, domesticnonprofit association, domestic nonprofitcorporation, or “any other organization orassociation” formed under a Colorado stat-ute or common law or “as to which the lawof this state governs relations among theowners and between the owners and theorganization or association and that is rec-ognized under the law of this state as aseparate legal entity.”5 The “any other or-ganization or association” catch-all in-cludes such entities as ditch and reservoircompanies and other special purpose cor-porations,6 as well as religious and benev-olent organizations.7 Trusts, estates, andsole proprietorships are not “domestic en-tities” and, thus, cannot be converted un-der these provisions.8 A joint venture, ifthere is such a thing that is not a GP,9 canbe converted only if it is a GP.

Domestic entities of any form also maybe converted into “any form of foreign en-tity recognized in the jurisdiction underthe law of which the entity will be consid-

ered to have been formed after the conver-sion.”10 Thus, for example, if the foreign ju-risdiction recognizes LLCs, any Coloradoentity may be converted into an LLC ofthat jurisdiction. CRS § 7-90-201(2), asamended by House Bill (“H.B.”) 04-1398,does not require that the foreign jurisdic-tion have a law recognizing the conver-sion.

On its face, CRS § 7-90-201(2) providesthat a business could successfully convertinto a foreign entity by filing the neces-

The Colorado Lawyer / November 2004 / Vol. 33, No. 11 / 11

GENERAL INTEREST ARTICLE

Conversion of Entities in Coloradoby Beat U. Steiner

This article discusses the conversion of domestic and foreign entities of one form to another form.It covers the mechanics of conversion, the legal effects of conversion, and tax and business issuesthat should be considered when converting an entity into a different form.

Beat U. Steiner is a partner in the Den-ver law firm of Steiner, Darling &Hutchinson LLP, with a practice concen-trating on real estate and general corpo-rate matters—(303) 837-1655; [email protected]. The author gratefullyacknowledges the assistance of JohnWilson of Holland & Hart LLP with re-spect to the tax portions of this article.However, any errors remain the respon-sibility of the author.

Reproduced by permission. ©2004 Colorado Bar Association, 33 The Colorado Lawyer 11 (November 2004). All rights reserved.

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12 Conversion of Entities in Colorado November

12 / The Colorado Lawyer / November 2004 / Vol. 33, No. 11

Organic Statutes and Acronyms Referred to in this Article1931 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 Article1931 LPs Limited partnerships governed by the 1931 LP Law and either the UPL or CUPA, except

when otherwise specifiedCooperatives Cooperatives governed by the Cooperative ActCorporations Corporations governed by the CBCAGPs General partnerships, whether governed by the UPL or CUPALLCs Limited liability companies governed by the LLC ActLLLPs 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 specifiedLLPs Limited liability partnerships, whether governed by the UPL or CUPA, except when other-

wise specifiedLPs Limited partnerships governed by the LP Act and either the UPL or CUPA, except when oth-

erwise specifiedLPAs Limited partnership associations governed by the LPA ActNonprofit Associations Unincorporated nonprofit associations governed by the Nonprofit Association ActNonprofit Corporations Nonprofit corporations governed by the Nonprofit Corporation ActS Corporations Corporations governed by the CBCA that have met the requirements for being taxed accord-

ing to Subchapter S of the IRC

Article 90 Definitions Referred to in this ArticleConstituent 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 juris-diction under the law of which the entity is formed, by which it is formed, or by which the entity obtains its status as anentity or the entity or any or all of its owners obtain the attribute of limited liability.Where a constituent filed documenthas been amended or restated,“constituent-filed document” means the constituent-filed document as last amended or re-stated (CRS § 7-90-102(6))

Constituent-Operating Document: Articles of incorporation, operating agreement, or partnership agreement, and bylaws of acorporation, 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 governthe 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 function-ally 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 re-spect 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))

sary constituent documents for the forma-tion11 of the entity in the foreign jurisdic-tion and meeting the other Colorado re-quirements for conversion. However, prac-titioners should ask to what extent theresulting entity will be recognized underthe law of the foreign jurisdiction.Will theentity be recognized for all purposes as be-ing the “same entity,”12 as before the con-version, or just a new entity in the foreignjurisdiction? Will the assets of the con-verting entity be vested in the foreign re-sulting entity as the Colorado conversionstatute provides? Based solely on the Col-orado statute, it would seem difficult togive a legal opinion as to the effect of theconversion on the continuation and theassets and liabilities of the convertingColorado entity under the law of the for-eign jurisdiction.

In addition, foreign entities of any formmay be converted into domestic entities ofthe same or any other form.13 This type ofconversion is permitted “if the conversionis not prohibited by the constituent docu-ments or organic statutes and if the for-eign entity complies with all of the re-quirements, if any, of its constituent docu-ments or organic statutes in effecting theconversion.”14 Once again, the foreign ju-risdiction need not have laws providing forconversion,as long as the conversion is notprohibited by the laws of the foreign juris-diction. Similarly, the constituent docu-ments of the constituent entities do notneed to provide for the conversion; theysimply cannot prohibit the conversion.

To the extent the constituent docu-ments or the organic statutes have re-quirements for conversion, these require-ments must be met. Once again, however,if the foreign jurisdiction has no conver-sion statute, and the conversion is effect-ed either pursuant to, or in a manner notprohibited by, the constituent documentsof the foreign entity and Article 90 alone,there may be questions concerning thestatus of the foreign entity and its assetsand liabilities under the law of the foreignjurisdiction after the conversion.As an ex-ample, the conversion may be effected un-der Article 90 and be fully effective in Col-orado, but, under the law of the foreign ju-risdiction, the entity may still exist in itsoriginal form in the foreign jurisdiction.The following questions may arise:

• Will it still be required to pay fran-chise taxes or file reports in the for-eign jurisdiction?

• Is title to its assets vested in the for-eign converting entity or in the Col-orado resulting entity?

• Are its owners personally liable ac-cording to the law of the foreign juris-diction or according to Colorado law?

Perhaps the practitioner concludes thatthe lack of good standing or even adminis-trative dissolution of the entity in the for-eign jurisdiction is of no consequence tothe resulting entity because the entity nolonger does business there. Perhaps thepractitioner is not concerned about title tothe assets because they are all located inColorado. However, it is still necessary todetermine that no personal liability or lienattaches as a result of the failure to payfranchise taxes, file reports, or meet otherrequirements imposed on the convertingentity in the foreign jurisdiction. More-over, the practitioner might be uncomfort-able about that liability, or in giving a le-gal opinion about that entity or its assets,if there is no law in the foreign jurisdictionaddressing the status of the converting en-tity. Accordingly, a conversion involving aforeign entity governed by laws that donot include a statutory provision for itsconversion should be undertaken with fullawareness that legal problems may resultin the foreign jurisdiction.

It is worth noting that there are lawsother than Article 90 that can effect achange in the form of an entity. CRS § 7-90-205 states that the conversion provi-sions of Article 90 are not exclusive. Forexample, a nonprofit corporation can be-come a ditch company governed by Article42 by complying with the provisions ofthat article.15 Registrations under CRS §§7-60-144 and 7-64-1001 “convert” GPs in-to LLPs and 1931 LPs and LPs intoLLLPs, and withdrawals of registrationunder the same sections reverse theseconversions; an election under CRS § 7-62-1103 by a 1931 LP to be governed bythe LP Act “converts” the 1931 LP into aLP; and an amendment to a GPs’ partner-ship agreement changing the governinglaw can “convert” the GP from, say, a Colo-rado GP to a Delaware GP.

Moreover, the conversion of a Coloradoentity into a foreign entity can be effectedunder the laws of foreign jurisdictionsthat have conversion statutes of theirown. Certain jurisdictions, such as Dela-ware, have statutory provisions for moreexotic entity changes, such as domestica-tion of non-U.S. entities16 and transfers(with or without continuance in Dela-ware) to other jurisdictions (other than astate).17 Although Article 90 covers allconversions in which a domestic entity iseither the converting or the resulting en-tity,Article 90 may not be the easiest way

to accomplish a change in the form of anentity, and the methods provided in theseother laws should be kept in mind.

At the same time, some conversionsthat are allowed under Article 90 are pro-hibited under the applicable organicstatutes or other laws. A single-memberLLC, for example, cannot be converted in-to any form of partnership because part-nerships, by definition, require more thanone partner. Similarly, a corporation, non-profit corporation, or LLC serving as aunit owners’ association under the Colo-rado Common Interest Ownership Actcannot lawfully be converted into anyform of partnership because partnershipscannot serve as associations under thatAct.18

Approval of Conversions—Generally

A conversion must comply with any organic statute or the commonlaw [that] expressly prohibits or re-stricts the right of any entity to con-vert into . . . any other form of entity,grants dissenter’s rights with respectto such . . . conversion, or imposes re-quirements on such conversion. . . .19

There are no provisions of any Coloradoorganic statutes (other than the provi-sions of Article 90 itself) or of common lawthat prohibit or restrict conversion orgrant dissenter’s rights or impose otherrequirements on conversions and that aregenerally applicable to Colorado entitiesor any one of the forms of domestic enti-ties. Any restrictions that presently existunder Colorado law outside of Article 90apply to entities in particular lines of busi-ness,20 such as insurance companies,banks, and certain professions.

The first step in effecting a conversionunder Article 90 is to obtain internal ap-proval of the terms and conditions of theconversion. CRS § 7-90-201(4) specifiesthe nature of the approval that is requiredfor a conversion.The approval required isbased on a hierarchy as follows:

Level 1: what the primary constituentdocuments and organic stat-utes expressly provide for ap-proval of the conversion;21

Level 2: in the absence of express provi-sions under CRS § 7-90-201(1),what the primary constituentdocuments and the organicstatutes provide for approval ofan amendment to the primaryconstituent documents; and

2004 Conversion of Entities in Colorado 13


Level 3: in the absence of provisions un-der CRS § 7-90-201(1) or (2),the unanimous consent of theowners (shareholders,partners,members, or the like).22

An example might be helpful here. Con-sider the approval required for a generalpartnership governed by CUPA to convertto a Colorado LLC. The organic statutesgoverning the GP are CUPA and Article90. CUPA does not expressly address theapproval for conversion of a GP, so coun-sel may ignore the organic statutes por-tion of level (1), listed above. Next, counsellooks to the primary constituent docu-ment of the GP (that is, the partnershipagreement).23 If the partnership agree-ment addresses the approval required forconversion, the provisions of the partner-ship agreement that do so will govern. Ifthe partnership agreement is silent onconversion, counsel then turns again toCUPA and the partnership agreement,this time to determine what they providefor approval of an amendment to the pri-mary constituent documents. The ap-proval provisions for such an amendmentwill apply to the conversion.24

CUPA, it turns out,does not directly ad-dress amendment to a partnership agree-ment; it defers to the partnership agree-ment.25 If the approval required foramending the partnership agreement isaddressed in the partnership agreement,that same kind of approval will be re-quired to approve a conversion. If thepartnership agreement has no such ap-proval provision, the unanimous consentof the partners is required. In that case,unanimous consent is required either un-der hierarchy level (2) (because unani-mous consent is the CUPA default rule foramendment to the partnership agree-ment) or under hierarchy level (3), whichmandates unanimous consent if both theorganic statutes and the primary con-stituent documents are silent as to the ap-proval required for amendment of the pri-mary constituent documents.

CRS § 7-90-201(4) does not resolve theproblem created, for example: (1) if unani-mous consent is required for amendmentof the articles of organization of an LLC orcertificate of limited partnership of an LPand only a two-thirds approval is requiredfor amendment to the operating agree-ment or limited partnership agreement;or (2) if different approvals are requiredfor amending different provisions of theoperating agreement or limited partner-ship agreement. In this author’s opinion,choosing the most stringent provision

(that is, the highest voting requirement)is the only safe bet.26

If there is a conflict between what theorganic statute provides and what the pri-mary constituent documents provide, theprovisions that prevail for other purposespresumably prevail for the purposes ofCRS § 7-90-201(4). With respect to anLLC, for example, the LLC Act requiresunanimous consent for an amendment toits primary constituent documents, butthe operating agreement can require alesser approval. Under CRS § 7-80-108,the operating agreement prevails over acontrary provision of the LLC Act (withsome exceptions). Therefore, any lesserapproval provisions of the operatingagreement prevail. Moreover, those lesserapproval provisions will govern the ap-proval for amendment to the primary con-stituent documents of the LLC and also,when level (2) of the hierarchy applies, theapproval for a conversion of the LLC.

With respect to a corporation, the resultis somewhat different. Under CRS § 7-110-103(5), the articles of incorporation ofa corporation can prescribe a greater, butnot a lesser,vote for approval of an amend-ment to the articles of incorporation.Thus,if a provision of the articles of incorpora-tion states that the board of directors,without approval of the shareholders, canamend any provision of the articles (cer-tain amendments, but not all amend-ments, may be approved solely by theboard under CRS § 7-110-102), the provi-sion would be ineffective. Hence, that ap-proval provision of the articles will not beeffective for determining the approval re-quired for conversion of the corporation.On the other hand, if a greater vote is re-quired by the articles for an amendmentto the articles, that greater vote also is re-quired for conversion.

An interesting problem arises if thegreater vote requirement for amendmentto the articles is contained in bylawsadopted by the shareholders. Under CRS§ 7-110-103, bylaws adopted by the share-holders may require a greater vote than isprovided in the organic statute. It istempting to believe that since the greatervote requirement is contained in the by-laws, and the bylaws are not a primaryconstituent document of a corporation, thebylaws requirement can be ignored forpurposes of CRS § 7-90-201(4). More like-ly, however, the author believes a courtwould conclude that the organic statutedictates the higher approval requirementcontained in the bylaws and that higherapproval is required for conversion.

Furthermore, when analyzing the req-uisite approval for conversion, counselshould be aware that some entities will re-quire two levels of approval.27 In Coloradocorporations, for example, amendments tothe articles of incorporation (unless other-wise provided in the articles and except incertain other circumstances)28 require arecommendation by the board of directorsor 10 percent or more of the shareholdersand approval by the shareholders.29 If lev-el (2) in the hierarchy listed above governsthe conversion of the corporation, the con-version will require the recommendationof the board of directors or 10 percent ormore of the shareholders and approval bythe shareholders. Similarly, if class votingapplies to approving amendments to thearticles of incorporation, class voting willbe required to approve a conversion.30 In-deed, all provisions relating to “any pre-liminary approval by managers for sub-mission to the owners, notices, quorum,voting, and consent by owners or thirdparties” must be complied with.31

As to corporations, the approval hierar-chy contains a serious anomaly.At hierar-chy level (2), the approval required forconversion is based on the approval re-quired for amendment to the articles of in-corporation for the corporation. BecauseCRS § 7-90-201(4) is keyed to the “pri-mary constituent documents,” it is clearthat the approval is based on what is con-tained in the articles of incorporation, notthe bylaws, of a corporation. Although formost entities, that approval will be thehighest level of approval required for anyaction of the entity, that is not the case forcorporations.

Under CRS §§ 7-110-103(5) and 7-107-206(3), the vote to amend articles of incor-poration is typically just a plurality of af-firmative votes over opposing votes at ameeting at which a quorum (which can beas little as one-third of the outstandingvotes) is present.32 However, other majorcorporate action, such as mergers andshare exchanges33 and sales of assets,34

requires the affirmative vote of a majori-ty of the outstanding shares. It thus ap-pears that it can take a smaller affirma-tive vote to approve a conversion of a cor-poration into some other form of entitythan to merge the corporation into anoth-er entity.

Approval Based on Change in Liability

In addition to the general owner ap-proval, any owner whose liability “solely



by reason of being an owner” is adverselychanged by the conversion has a separateright to approve or disapprove the conver-sion under CRS § 7-90-201(4)(b). Thisclass of owners includes those whose lia-bility for the obligations of the entity be-fore the conversion is limited but who willbe liable for obligations of the entity afterconversion or “will be so liable to a greaterextent.” The following will certainly fallwithin this mandatory consent class: thelimited partners of an LP, partners of anLLP or LLLP, members of an LLC orLPA, shareholders of a corporation, andmembers of a nonprofit corporation, who,after the conversion, will be general part-ners of a GP or LP, or members of a non-profit association. These are ownerswhose liability is clearly limited before theconversion and clearly unlimited (or lesslimited) after the conversion.

Owners not intended to be included inthis mandatory consent class include: thelimited partners of an LP, partners of anLLP or LLLP, members of an LLC orLPA, shareholders of a corporation, andmembers of a nonprofit corporation who,after the conversion, are the limited part-ners of an LP, partners of an LLP orLLLP, members of an LLC or LPA, share-holders of a corporation, or members of anonprofit corporation. These are ownerswhose liability is clearly limited beforeand after the conversion. The changes inliability for various types of conversion aresummarized in the chart accompanyingthis article, entitled “Appendix I, Domes-tic Entity Conversions—Ownership andManagement Issues.”

The words “will be liable to a greaterextent,” however, may prove to be trouble-some in stating general rules regardingthis mandatory consent class. An argu-ment could be made, for example, that alimited partner in an LP has liability to agreater extent than a shareholder in acorporation by virtue of CRS § 7-62-608,relating to the wrongful return of contri-butions. Alternatively, counsel might tryto show that limited partners in an LPhave greater liability for obligations of theLP than do shareholders of a corporationby virtue of CRS § 7-62-303, relating tothe liability of limited partners if they be-come involved in management of the LP.The drafters of the legislation did not in-tend this to be a subtle test. It was as-sumed that the liability of owners is thesame in any limited liability entity (otherthan general partners in an LP), at leastfor purposes of this provision.35

Members of a nonprofit corporation be-ing converted into a nonprofit associationhave a more substantial argument for be-ing part of this mandatory consent class.This is because the liability protection ofa member in a nonprofit association is cer-tainly more limited than that afforded themembers of a nonprofit corporation.36

CRS § 7-90-201(4)(b) does not makeclear whether the consent of the ownerswhose liability will change can consent inadvance to a particular conversion or con-version in general. A limited partnershipagreement could provide that the generalpartners may convert the LP at any timeto any other entity without the consent ofthe limited partners, as long as the eco-nomic interests of the limited partnerswere not changed thereby.Would this pro-vision be adequate to override the re-quirement for consent contained in CRS §7-90-201(4)(b)? Counsel could make astrong argument that the general part-ners’ contractual right should be enforced,but good arguments to the contrary alsocould be made. In many cases, the easiestway to obtain approval may be to amendthe existing primary constituent docu-ments to expressly permit the conversion.Amending the primary constituent docu-ments also may be the easiest way toeliminate doubts about the approval re-quired for conversion.37

Article 90 is a “generic” conversion pro-vision; accordingly, it may be that its ap-proval provisions do not furnish a totallyclear result for every entity seeking toconvert. The most prudent path is forpractitioners to choose the most stringentapproval requirement and, in the absenceof clarity, to obtain the unanimous consentof the owners.

What Must be ApprovedPursuant to CRS § 7-90-201(4)(a), as

amended by H.B. 04-1398, the approval isto encompass not only the conversion it-self, but specifically must include the“terms and conditions of the conversion. . . , including the manner and basis ofchanging the owners’ interests of eachconverting entity into owners’ interests orobligations of the resulting entity or intomoney or other property in whole or inpart.”38 Thus, it would appear that a reso-lution or consent merely stating,“We here-by approve the conversion of the LLC intoa Colorado corporation” is insufficient.Theapproval also should state: (1) how manyshares in the corporation will be author-ized and issued; (2) of what class or class-

es39 each membership interest will be con-verted into shares of the corporation; and(3) the number of shares that will be is-sued to each member of the LLC and ofwhat class or classes.

Now that only “bare bones” constituent-filed documents are required for the for-mation of most entities, the practitionerdocumenting the approval for a conver-sion will have to give careful thought tothe “terms and conditions of the conver-sion” that need to be approved. How muchmore detail is required in an approval? Inparticular, how much more detail is re-quired when changing the form of the en-tity, in and of itself, will make changes tothe “deal”? CRS § 7-90-201 does not say.Thus, it will be possible to litigate the ef-fectiveness of a conversion on the basisthat not all of the terms and conditionswere approved whenever the approval isnot comprehensive. Some of the termsand conditions of a conversion that shouldbe addressed in the approval are summa-rized in Appendix I.

However, these are certainly not all theissues that should be considered. The is-sues listed in the chart fall into five cate-gories: purposes, ownership, change in li-ability, management, and constituent doc-uments.

The first category—purposes—is fun-damental.Often, the entity’s purposes willremain the same, but certain conversions,such as those involving nonprofit corpora-tions and nonprofit associations, may re-quire that the purposes of the entity bechanged, either to a nonprofit purpose orto a for-profit purpose.

Second, ownership must be addressed.Shares of corporations, memberships ofnonprofit corporations, nonprofit associa-tions, LLCs and LPAs, and partnershipinterests must be changed into theircounterparts in the resulting entity un-less those interests are disposed of withcash or “other property.”40

The third category, change in liability,may occur both in how the organic stat-utes for the resulting entity treat the own-ers and managers (as discussed above) oras the result of provisions in the con-stituent documents of the resulting enti-ty. Changes in liability also could occur bythe terms of agreements with third par-ties or even laws or regulations.41

The fourth category is management.The way an entity is managed generallychanges when an entity is converted fromone form into another. How these changesare made usually is reflected in the con-



stituent documents for the resulting enti-ty but, in any event, should be part of theapproval for the conversion.

The fifth category is the constituentdocuments. Effecting a conversion will re-quire the constituent filed documents ofthe resulting entity, if it has any, to be filedin the records of the Secretary of State.42

In most cases, it also will be necessary toprepare an appropriate constituent oper-ating document for the resulting entity orto amend the constituent operating docu-ment of the converting entity for the prop-er operation of the resulting entity. If theconstituent operating document for theconverting entity is used for the resultingentity, it should be amended to considerthe changes that are taking place in thepurposes, ownership,management,and li-ability of its owners.As a practical matter,rarely will the mere filing of the docu-ments required to be filed in the recordsof the Secretary of State in order to effectthe conversion be adequate to make theconversion work properly. Any new con-stituent documents, or the changes to ex-isting constituent documents, should bespecifically approved.43

Statements of ConversionAnd Other Filings

In most cases, following approval of theterms and conditions of the conversion, astatement of conversion must be deliveredto the Colorado Secretary of State for fil-ing.44 The contents of a statement of con-version are simple and include:

1) the entity name of the converting en-tity, principal office address of itsprincipal office, jurisdiction under thelaw of which it is formed, and itsform of entity;

2) the entity name of the resulting enti-ty, principal office address of its prin-cipal office, jurisdiction under the lawof which it is formed, and its form ofentity; and

3) a statement that the converting enti-ty has been converted into the result-ing entity.45

Note that the statement of conversionmust contain all of the above-stated infor-mation, but may not contain more thanthe above-stated information.46 Thus,even if it is desirable to do so, includingthe terms and conditions of the conversionin the statement of conversion is not per-

mitted. It may be possible, however, to in-clude the terms and conditions of the con-version in the constituent filed document,if one is required to be filed for the result-ing entity and it is of a type that, underthe organic statute, permits more thanthe required information to be included inthe document.

No statement of conversion needs to befiled if neither of the constituent entitiesto the conversion has or will have a con-stituent filed document filed in the recordsof the Secretary of State.47 Thus, if theconstituent entities are only GPs or non-profit associations, no statement of con-version is required.48 Even if it is desirableto file a statement of conversion in caseswhere filing one is not required, it is notpermitted for a statement of conversion tobe filed in these cases.49 The filing require-ments for the different types of domesticentity conversions are summarized in thechart, entitled,“Appendix II,Domestic En-tity Conversions—Filing Requirements”found at the end of this article.

Practitioners should remember that,under CRS § 7-90-301.5, causing a state-ment of conversion to be delivered to theSecretary of State for filing constitutes



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the affirmation or acknowledgement ofeach individual causing such delivery,under penalties of perjury, that . . . theindividual in good faith believes thedocument is the act and deed of the per-son on whose behalf the individual iscausing the document to be deliveredfor filing, taken in conformity with therequirements of this part 3 [of Article90], the constituent documents, and theorganic statutes, and that the individ-ual in good faith believes the facts stat-ed in the document are true and thedocument complies with the require-ments of this part 3 [of Article 90], theconstituent documents, and the organ-ic statutes.

Thus, the filing of a statement of conver-sion requires a legal determination thatthe approval requirements for conversion,along with all other legal requirements forthe conversion, have been fulfilled.

Additional MechanicsIf the resulting entity will be an entity

for which a constituent filed document isfiled in the records of the Secretary ofState for its formation, the converting en-tity must deliver that constituent filed doc-ument for filing, along with the statementof conversion.50 If the resulting entity is aforeign entity, it must appoint a registeredagent for service of process in Coloradopursuant to CRS §§ 7-90-701 et seq.,51

added by H.B. 04-1398, regardless ofwhether it would be required to do so oth-erwise. Also, if it transacts business orconducts activities in Colorado (unless the

resulting entity is a foreign GP that is notan LLP or a foreign nonprofit association),it must have a statement of foreign au-thority filed in the records of the Secretaryof State and must otherwise comply withthe provisions of CRS §§ 7-90-801 et seq.52

CRS §§ 7-90-801 et seq. is the part of Ar-ticle 90 added by H.B. 04-1398 to addressthe qualification of foreign entities totransact business or conduct activities inColorado. If the resulting entity is a for-eign entity it also “shall promptly pay tothe dissenting owners of each domesticentity party to the conversion . . . theamount, if any, to which they are entitledunder the organic statutes. . . .”53

In conversions involving nonprofit cor-porations,and especially if a nonprofit cor-poration is being converted into a for-prof-it entity, it may be wise to determinewhether any requirements will be im-posed by the Colorado Attorney Generalin light of CRS § 7-90-201(7).This statuteexpressly preserves the common-law pow-ers of the Colorado Attorney General con-cerning the conversion of a nonprofit cor-poration.

Effective Date of a Conversion

Under CRS § 7-90-201(b), a conversionbecomes effective as specified by the or-ganic statutes.54 In Colorado, the only or-ganic statute that addresses the effective-ness of conversions in general is CRS § 7-90-201(b) itself. Thus, it appears that thefirst sentence of this section of the statuterelates to conversions involving foreign,

rather than Colorado, entities, and to or-ganic statutes of Colorado, if any, that areapplicable to entities engaged in specificlines of business and that might affect theeffectiveness of a conversion.

As to Colorado entities generally,55 aconversion is effective when the state-ment of conversion is effective pursuant toCRS § 7-90-304. This statute providesthat a filed statement, including a state-ment of conversion, is effective when it isfiled unless the filed statement contains adelayed effective time or date. If a state-ment of conversion contains a delayed ef-fective time or date, the statement be-comes effective at that time or on thatdate.56 CRS § 7-90-201(b) does not, on itsface, state that the constituent filed docu-ment for the resulting entity (if one is re-quired to be filed under CRS § 7-90-301(5.5)) also must be filed for the conver-sion to be effective, but this is almostcertainly true.57 It may be that the Secre-tary of State will not allow a statement ofconversion to be filed without the simul-taneous or subsequent filing58 of any re-quired constituent filed document for theresulting entity.

In conversions in which no statement ofconversion or constituent filed documentis required to be filed, the conversion be-comes effective at the time and on thedate determined by the owners of the con-verting entity.59 Interestingly, Article 90does not require that the determination(or for that matter the approval or anyother evidence of the conversion) needs tobe in writing.



EFFECT OF CONVERSIONThe effect of conversion of an entity is

clearly stated in CRS § 7-90-202(4): “Theresulting entity is the same entity as theconverting entity.” No transfer of assets orliabilities takes place.As noted in the dis-cussion below, this “same entity” languageis useful in effecting conversions and min-imizing the disruption of the convertingentity’s business. Several consequencesresult from conversions, and practitionersshould pay close attention to these conse-quences so as to avoid problems.

No DissolutionA conversion does not interrupt the

continuous existence of the converting en-tity. CRS § 7-90-202(3) provides:

Unless otherwise agreed or otherwiseprovided by the organic statutes, otherthan this article [90], the converting en-tity shall not be required to wind up theentity’s affairs or pay obligations anddistribute the entity’s assets, and theconversion shall not be deemed to con-stitute a dissolution of the convertingentity and shall constitute a continua-tion of the existence of the convertingentity in the form of the resulting entity.

Presently, there are no organic statutesapplicable to Colorado entities generally,or to any specific form of Colorado entitygenerally, that make a conversion an occa-sion for winding up or the cause of a dis-solution of the converting entity. If such astatutory requirement exists, it would re-late to an entity in a particular line ofbusiness. However, the author is notaware of the present existence of any suchrequirements. Pursuant to CRS § 7-90-202(2), however, the owners could alwaysagree that a conversion is the occasion fora winding up or dissolution, although, inthe abstract, it seems a rather unusual re-sponse to a conversion.

LiabilitiesA conversion does not affect the obliga-

tions of the converting entity incurred pri-or to the conversion60 nor is the personalliability of any person incurred prior tothe conversion affected.61 Thus, for exam-ple, if a GP converts to an LLC, the gener-al partners of the GP remain personallyliable for obligations the GP incurred pri-or to the effective date of the conversion.Following the conversion, however, thegeneral partners who become members ofthe resulting LLC are not personally li-able for obligations the LLC incurs afterthe conversion is effective.

Some types of conversions are not favor-able to creditors. Entities, the owners ofwhich have general liability, can convert toa form of entity with limited liability. Thecreditor may never know of this change.The creditor could learn of it by searchingthe records of the Secretary of State, butthis is not a usual practice. The creditormight be notified, but it may not be in theinterest of the converting entity to givesuch a notice.The creditor might be put onnotice if the entity name changes, but inmany cases the name the entity uses intransacting its business will not change.62

This treatment of creditors is notunique to the conversion statute. It is con-sistent with the policy adopted years agowhen the requirement that a trade nameinclude the same limited liability identifi-er as an entity name was dropped fromthe trade name statute.63

Unintended EffectsOf a Conversion

As practitioners think through the im-plications of conversion, subtle issues maybegin to surface. Unintended changes



may occur, especially if the goal, as a busi-ness matter, is to maintain the status quofor the owners and the managers of theconverting entity. For example, the own-ers of some entities enjoy statutory rightsthat the owners of other entities do notenjoy. Also, for example, corporate share-holders of corporations formed prior to Ju-ly 1, 1994 enjoy preemptive rights.64 If oneof those corporations is converted to an-other form of entity, those preemptiverights could be lost. The CBCA grants tocorporate shareholders dissenters’rights,65 exercisable upon certain occa-sions. These rights may be lost in a con-version to another form of entity unlessthey are contractually provided for.

On the other hand, these rights will begained in the conversion of an entity intoa Colorado corporation unless they arewaived. Statutory rights to books andrecords66 and rights to indemnificationand reimbursement, for example, varyamong different forms of entities,67 sothese rights are affected by a conversion,even if nothing is said about them in theconstituent documents of the resulting en-tity.

Indeed, in some conversions, particular-ly when the resulting entity is a corpora-tion, rights will be granted that cannot bewaived or altered in the constituent docu-ments. Organic statutes for corporate-type entities are not as flexible as the non-corporate organic statutes; generally, un-less the corporate law expressly allowsthe constituent documents to overrideprovisions of the organic statute, provi-sions at variance with the organic statuteare not enforceable. Noncorporate organ-ic statutes, however, tend to favor contrac-tual flexibility, and their provisions gener-ally can be overridden by contract, unlessexpressly prohibited.Thus, unintended ef-fects will be more difficult, and sometimesimpossible, to ameliorate when convertinginto the corporate form. In all cases, prac-titioners should consider as many of theacquired and lost rights as possible whenundertaking a conversion.

Changes in management powers, du-ties, and authority caused by a conversionalso should be considered in every conver-sion. In a corporation, to replicate fully themanagement powers, duties, and author-ity of the general partner of a GP or of themembers of a member-managed LLCtakes careful drafting. In converting a cor-poration to a partnership or an LLC, thebalance of power between the sharehold-ers, directors, and officers will be lost, un-less similar concepts are incorporated into

the constituent operating documents ofthe resulting partnership or LLC.The dif-ferences in the duties of shareholders toone another and the duties of partners toone another are significant. Moreover, thedifferences in the duties of directors to acorporation, general partners to a part-nership, and managers to an LLC aresubtle, but also may be significant to theparties involved. Any changes in dutiesresulting from the conversion should, atleast, be thought about ahead of time.

The power to amend either or both ofthe constituent documents and the oper-ating documents also might inadvertentlychange in a conversion and, thus, alwaysshould be evaluated.A change in the pow-er to amend is particularly likely to occurin cases where rights that typically ap-pear in the operating documents of theconverting entity (for example, virtuallyall rights in the operating documents of anoncorporate entity) are split between theconstituent documents and the operatingdocuments of the resulting entity (such asthe articles of incorporation and bylaws ofa corporation or nonprofit corporation).

If the procedure and vote required foran amendment to the constituent fileddocuments differ from an amendment tothe constituent operating documents,there may be an inadvertent power shiftin the resulting entity.This is because theamendment of a particular provision inthe operating documents becomes harderor easier following the conversion, de-pending on whether the provision finds itsway into the constituent documents or theoperating documents. In short, in under-taking a conversion, practitioners mustlook below the surface for potential unin-tended consequences of the conversion.

TAX CONSIDERATIONSThe conversion of an entity should not

be undertaken without adequate taxcounsel. What state law makes so easy todo, the Internal Revenue Code in some in-stances makes painful (or at least expen-sive). The chart, entitled “Appendix III,Entity Conversions—Tax Treatment,” atthe end of this article summarizes in verygeneral terms the tax results of the vari-ous types of conversions. The tax laws donot look exclusively to the state law formof an entity to determine its method oftaxation. Indeed, under the “check-the-box” regulations,68 an entity of a particu-lar state law form can be treated in a vari-ety of ways under the tax laws.According-ly,Appendix III presents the conversion ofentities not from the perspective of the

various state law forms, but from theirtaxation method.

An LLC, for example, can be treated forfederal income tax purposes (and, thus,Colorado income tax purposes) in any offive ways: as a corporation, S corporation,partnership, tax-exempt entity, or disre-garded entity (that is, an entity that is notseparate from its owner). Not all forms ofentities can be treated in any of these fiveways, but many can be treated in morethan one of these ways for tax purposes.

As can be seen from Appendix III, someconversions are taxable transactions.Generally, when entities that are treatedas corporations for tax purposes are con-verted into entities that are taxable aspartnerships, there will be immediate taxconsequences. When tax-exempt entitiesare converted from one form into another,they may not automatically lose their tax-exempt status, but the Internal RevenueService takes the position that the entitymust re-apply for its tax-exempt status,generally not a welcome result.

Other conversions are relatively benignfrom a tax standpoint. Generally, entitiestreated as partnerships for tax purposesthat are converting to other forms of enti-ties treated as partnerships for tax pur-poses can do so without significant ad-verse tax effects. The same is true if theyconvert to a form of entity treated for taxpurposes as a corporation.The conversionof entities that are disregarded for taxpurposes under the “check-the-box” regu-lations generally can be converted into en-tities treated as corporations or partner-ships for tax purposes without adversetax consequences.69

Every conversion, however, needs to beexamined from a tax standpoint. For ex-ample, although a conversion of a part-nership-type entity into corporate-typeentity generally is not a taxable transac-tion, the form of the conversion may affectwhether the tax year closes, the holdingperiod for assets of the entity, and the ba-sis of assets owned by the entity, as wellas the basis of the owners’ interests in theentity.70 The treatment of these matters,in turn, can have immediate or later taxconsequences that must be taken into ac-count. Generally, any change in the own-ership of the entity that takes place in thecourse of a conversion also must be ana-lyzed from a tax standpoint.

Following a conversion, the taxpayeridentification number (“TIN”) of the enti-ty may change, even though the resultingentity is the same entity as the convertingentity for state law purposes. Corporate-



type entities that convert into partner-ship-type entities generally will need anew TIN. Partnership-type entities con-verting into partnership-type entities,where the partnership continues for taxpurposes, generally will not need a newTIN. A disregarded entity that convertsmay not have a TIN; when it converts, itmay need one.71 The need for a TIN, or anew TIN, has to be determined in connec-tion with a conversion.

BUSINESS CONSIDERATIONS

Conversions do not occur in a vacuum.Entities have assets and business activi-ties that may be significantly affected bya conversion.Accordingly, careful thoughtmust be given to the practical conse-quences of a conversion. The balance ofthis article considers some of the morecommon results of a conversion.

Change of NameAs indicated in the example discussed

above in connection with the effect of aconversion on creditors, an entity thatconverts may or may not experience aname change.A change of name generallyis required if the resulting entity needs adifferent limited liability identifier (suchas Inc., LLC, or LLP) than is required ofthe converting entity.Thus, an LP named“ABC, L.P.” converting to a corporationwould experience a name change because“L.P.” is not a permitted limited liabilityidentifier for a corporation.72 However, anLP named “ABC, Ltd.” converting to a cor-poration or an LLC would not need tochange its name because “Ltd.” is a per-missible limited liability identifier for cor-porations and LLCs, as well as LPs.73

A change of name might not be re-quired, but certainly would be the betterpractice where a limited liability entity isbeing converted into a general partner-ship or unincorporated association—nei-ther of which is required to have a limitedliability identifier. Although laws govern-ing entity names and trade names do notprohibit a general partnership or unincor-porated association from doing businessunder a name that includes a limited lia-bility identifier, it is misleading and is con-sidered to be bad practice to do so. It is al-so generally considered bad form to havelimited liability entities doing businessunder an inappropriate limited liabilityidentifier, even though it can be donelegally by including the inappropriateidentifier in a trade name.

Changing an entity name is usually ahassle, involving changes in businesscards, stationery, advertising materials,signs, and the like. If the entity does busi-ness in a trade name without a limited li-ability identifier (which is permitted), thenumber of things that needs to bechanged is considerably reduced. Howev-er, there may be a legal risk in doing so.Although there are no published opinionson whether the shield of limited liabilityis lost if the existence of that shield is notdisclosed, in a significant agency case, theColorado Supreme Court held an agent ofan LLC personally liable to the personswith whom he was dealing when he failedto disclose that he was acting in his capac-ity as an agent for an LLC.74 Also, prior toundertaking a conversion, practitionersshould determine that the proposed nameof the resulting entity is a name that isavailable in the records of the Secretary ofState.

Trade Names and Intellectual Property

A trade name for a converting entityfiled in the records of the Secretary ofState pursuant to CRS § 70-71-101 willremain the trade name of the resultingentity in those records if the resulting en-tity is of a type that has its trade namefiled in the records of the Secretary ofState.75 If the resulting entity is not one ofthose types, it will have to register itstrade name with the Department of Rev-enue pursuant to CRS § 24-35-301. Be-cause the entity remains unchanged in aconversion, any common-law goodwill inthe trade name will belong to the result-ing entity. Trademarks registered withthe Colorado Secretary of State pursuantto CRS §§ 70-70-101 et seq. also will followthe conversion and become that of the re-sulting entity without a separate filing.For federal registrations of patents, trade-marks, and copyrights, change of nameforms may be used to recognize changesin the name of the holder resulting fromthe conversion.76

Bank AccountsOne of the first practical matters that

should be addressed following a conver-sion is the entity’s bank accounts. Thename on each account should be changedto reflect the new name, the form of entity,and the jurisdiction of formation of the re-sulting entity. If there is a change in theform of the entity or the jurisdiction of itsformation, the bank may require new au-

thorizing resolutions appropriate to thenew form of entity.

In the author’s experience, banks maybe lax in their requirements following aconversion, as long as the TIN of the enti-ty stays the same.A limited liability entityshould be concerned, however, that itschecks reflect the correct name of the enti-ty, because proper bank accounts are, in“piercing the corporate veil” cases, one ofthe indicia that corporate formalities havebeen followed.77

ContractsPrior to effecting a conversion, it would

be prudent to inspect the converting enti-ty’s contracts to be certain that none of theentity’s contractual rights will be impairedby the conversion. Because the entitystays the same in a conversion, an assign-ment of the contract does not take place;thus, a conversion should not pose a prob-lem.The types of contract clauses that de-serve attention, however, are those thatimpose notice, consent, or other require-ments relating to changes in the name orchanges in the form of the entity. Particu-lar attention should be paid to loan andfranchise agreements, which generallyhave comprehensive clauses regardingchanges in the contracting parties thatcould be problematic in a conversion.

Governmental Permits andRegulated Activities

Entities that are subject to governmen-tal regulation or whose businesses are de-pendent on governmental licenses or per-mits should determine in advance that noregulatory requirement is violated or li-cense or permit is voided or adversely af-fected by the conversion. In addition, anyrequirements for notice or other action re-quired by the governmental agency or thepermit before or following a conversionshould be identified in advance and com-plied with. Some conversions may not bepossible for the simple reason that someregulatory agencies have not kept pacewith the proliferation of new legal entitiesand, thus, under existing regulations,some businesses cannot be conducted incertain forms of entities.

This is particularly true, for example,with LLCs, which, despite their prolifera-tion, have not found their way into manygovernmental regulations and proce-dures. No practitioner welcomes a noticefrom a governmental agency stating thatit does not issue a certain permit to LLCs,but only to corporations and partnerships.



Title to Real PropertyThe instruments effecting conversions

are filed in the records of the ColoradoSecretary of State. If an entity owns realproperty, to preserve the sanctity of title toits real property, the conversion also needsto be reflected in the real estate records.These are located in the office of the clerkand recorder of the county in which theentity’s real property is located.78

Title examiners hope to find in theclerk and recorder’s grantor/grantee indexconsistency in the name, form, and juris-diction of formation of the entity that ac-quired title to a parcel in real propertyand of the party that makes a subsequentdisposition of that real property or inter-ests therein.Any inconsistencies are usu-ally reported as exceptions to title. Con-versions often will result in changes thatshould be reflected in the real estaterecords.

The Colorado Bar Association TitleStandards Committee has addressed con-versions in a Title Standard.79 Title Stan-dard 9.6.2 provides the following (in theusual format for a Title Standard, a prob-lem followed by an answer):

9.6.2: Conversion or Merger of Entities.Problem: Several Colorado statutes

provide that certain forms of entitiesmay convert to a different form of entityor merge with the same or a differentform of entity. If, pursuant to any Col-orado Statute which provides for suchconversion or merger and for filing evi-dence of such conversion or mergerwith the Colorado Secretary of State,anentity holding title to real property con-verts from the form of entity in whichsuch title was acquired to another formof entity or merges with the same oranother form of entity, what documentor documents should be recorded to evi-dence such conversion or merger?

Answer: One of the following shouldbe recorded in the county in which suchreal property is located: (i) the docu-ment to be filed with the Secretary ofState evidencing such conversion ormerger and containing evidence of suchfiling, or (ii) any document issued by theSecretary of State evidencing such con-version or merger.

Thus, an inconsistency in the real estaterecords caused by the conversion of an en-tity, insofar as marketability of title is con-

cerned, is cured by recording a certifiedcopy of the filed statement of conversionin the real property records of the countyin which the entity’s real estate is located.Title Standard 9.6.2 does not addresswhat should, or may, be done if no state-ment of conversion is required to be filed.

An inconsistency in record title causedby a conversion also can be cured byrecording a deed from the converting en-tity to the resulting entity. Recording adeed, however, suggests that a conveyanceof the property has occurred, and therecording may create unwelcome ques-tions and undesired problems. For exam-ple, recording a deed may raise questionsunder due-on-sale clauses in secured loandocuments or under transfer tax ordi-nances as to whether a transfer of title tothe real property has occurred.80 Thesequestions generally can be avoided byrecording a certified copy of the filed state-ment of conversion rather than a deed.

Title InsuranceEntities that own real property usually

have title insurance coverage. The mostcommon form of coverage in Colorado is



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pursuant to the American Land Title As-sociation (“ALTA”) Owner’s Policy (FormB. Rev. 10-17-92).Title insurance coverageunder this type of policy (as well as itspredecessors) is not impaired by the con-version of the insured entity. In a conver-sion, there is no change in the entity, sothe resulting entity remains the insuredunder the title insurance policy. The defi-nition of the “insured” under the ALTAform of Owner’s Policy is as follows:

The insured named in Schedule A [theSchedule in which the insured party isnamed], and, subject to any rights ordefenses the Company would have hadagainst the named insured, those whosucceed to the interest of the named in-sured by operation of law as distin-guished from purchase including, butnot limited to, heirs, distributees, de-visees, survivors, personal representa-tives, next of kin, or corporate or fiduci-ary successors.

Nevertheless, practitioners may find ituseful or comforting to have the title in-surance policy endorsed to reflect whatev-er has been changed (such as the name,form of entity, or jurisdiction of formation)in the conversion. Change of name en-dorsements are usually available from ti-tle companies, for a small fee.

Fairway EndorsementsFor most real estate practitioners,

changes to entities bring to mind thespecter of Fairway Development Co. v. Ti-tle Insurance Co. of Minnesota.81 In thatcase, the court excused the title insurerfrom liability under a policy for title insur-ance because, the court held, under Ohio’sgeneral partnership law, a change in thepartners resulted in the dissolution andtermination of the insured partnershipand the formation of a new, uninsuredpartnership.That case brought about thepractice of obtaining “Fairway endorse-ments” to continue title insurance cover-age in situations in which a dissolution ofthe insured entity occurs, but where theinsured entity continues its business.

Conversions do not result in the disso-lution of an entity by statute; accordingly,a Fairway endorsement generally is notrequired. However, a Fairway endorse-ment would be useful if the constituentdocuments of the entity or another agree-ment provide for dissolution on conver-sion and the business is permitted to becontinued on the occurrence of some oth-er additional event, such as a vote of theowners. In that situation,a properly word-ed Fairway endorsement82 will provide for

continued title insurance coverage, de-spite the conversion and the dissolutioncaused by it.

Real Property Transfer Taxes and Sales Taxes

Many resort communities in Coloradoimpose a tax on the transfer of real prop-erty.83 A conversion should not triggersuch a tax because the converted entity isthe same entity as before and no transferof real property is involved in a conver-sion. Nevertheless, any relevant transfertax ordinance should be reviewed. Nosales or use tax is payable upon a conver-sion because there is no transfer of as-sets.84

Deeds of Trust and Mortgages

Deeds of trust or mortgages that en-cumber real property often contain so-called “due-on-sale” clauses. The wordingof such clauses varies considerably. Ac-cordingly, prior to effecting a conversion ofan entity that owns encumbered realproperty, practitioners should read thedeed of trust or mortgage to determinewhether any covenant is violated by theconversion. Due-on-sale clauses that focuson a transfer of title to the real propertywould not be violated by a conversion be-cause no transfer takes place.

Prohibitions or requirements relating toconversions increasingly are found in realestate loan documents, because lendersare concerned about the legal implicationsto them when a conversion takes place.Commonly seen clauses prohibit anychange in the “form” of the borrower. An-other common provision is the require-ment that the lender be notified of anychange in the name of the debtor, the formof entity, or the jurisdiction in which it isorganized.The discussion below related toUniform Commercial Code (“UCC”) filingsexplains the appropriateness of this lattertype of provision.

LeasesProhibitions or restrictions on the as-

signment of leases are commonplace.These no-assignment clauses are oftendrafted with detail similar to that foundin deed of trust due-on-sale clauses.A con-verting entity does not violate a no-as-signment provision because no transfer ofthe converting entity’s interest in thelease takes place in a conversion. Conver-sions can cause difficulties in leases, how-

ever, if a no-assignment clause, or anoth-er clause, expressly prohibits conversionsor related changes, such as changes in theform of the entity. Landlords who haveperfected security interests in assets oftheir tenants, or who are beneficiaries ofletters of credit used as security deposits,might want to require prior notice of atenant’s conversion to avoid the problemscreated by conversion, discussed in thenext two sections.

UCC FilingsUnder Article 9 of the UCC as adopted

in Colorado,85 with some exceptions, thelaw governing perfection of a security in-terest is determined by the debtor’s loca-tion.86 The location of a debtor depends, inpart, on whether the debtor is a registeredorganization.87 A registered organizationis defined as “an organization organizedsolely under the law of a single state orthe United States and as to which thestate or the United States must maintaina public record showing the organizationto have been organized.”88 In Colorado,registered organizations are those domes-tic entities for which a constituent fileddocument is required for formation (forexample, corporations, nonprofit corpora-tions, cooperatives, LPs, LLPs, LLLPs,LLCs, and LPAs) .

Under Article 9 of the Colorado UCC, aregistered organization that is organizedunder the law of a state is located in thatstate.89 Thus, a Colorado corporation, forexample, is located in Colorado.90 Also un-der Article 9 of the Colorado UCC, perfec-tion of security interests by filing a financ-ing statement is accomplished by filingwith the Secretary of State of the state inwhich the debtor is located.91 Accordingly,when a foreign debtor that is a registeredorganization converts into a Colorado en-tity that is a registered organization, aUCC financing statement showing the re-sulting Colorado entity as debtor shouldbe filed with the Colorado Secretary ofState.

Similarly, when a Colorado debtor thatis a registered organization is convertedinto a foreign entity that is a registered or-ganization, a UCC financing statementshowing the resulting entity as debtorshould be filed with the filing office of theforeign jurisdiction in accordance with Ar-ticle 9 of the UCC as in effect in that for-eign jurisdiction. Thus, for example, if aColorado LLC converts into a Delawarecorporation, a UCC financing statementshould be filed in Delaware in accordancewith Article 9 of the UCC as in effect in



Delaware. If this does not occur, the exist-ing security interest remains perfected,but only for four months, or less if perfec-tion otherwise lapses before the expira-tion of the four-month period.92

A debtor that is an organization, butnot a registered organization, is located ei-ther at its place of business if it only hasone location or at its chief executive officeif it has more than one place of business.93

If such an organization is converted sothat it becomes a registered organization,the place where it is located may change,even if its place of business or chief exec-utive office does not change. For example,the location of a Colorado GP, with its soleplace of business in Colorado, will changeto Delaware if the GP converts to a Dela-ware corporation, even if it maintains itssole place of business in Colorado. In thiscase, the place to file a financing statementfor the entity will change from Colorado toDelaware, and any security interest per-fected by filing a financing statement inthe Colorado Secretary of State’s Officewill remain effective only for four monthsafter the conversion (assuming it does nototherwise lapse earlier). A new financingstatement should be filed in Delaware in

accordance with the UCC as in effect inDelaware to avoid a lapse in perfection.

Following a conversion in which the re-sulting entity’s name is different than theconverting entity’s name, it will be appro-priate to amend any existing financingstatement that has the converting entityas a debtor. An amendment also may beappropriate if the type of organization, ju-risdiction of organization, or organization-al identification number is stated in a fi-nancing statement and has changed.

When the converting entity is thedebtor and its name changes, whether anamendment is required to maintain theeffectiveness of a financing statement willturn on whether the change in name re-sulting from the conversion makes the fi-nancing statement “seriously misleading.”Under CRS § 4-9-507(c), if a debtor sochanges its name that a filed financingstatement becomes seriously misleading,the effectiveness of the financing lapsesfour months after the change in name, un-less the financing statement is amendedappropriately.

The most common change in a debtor’sname resulting from a conversion, if thereis one at all, will be in the limited liability

identifier. Does a change in the limited li-ability identifier, by itself, make thedebtor’s name as shown in the original fi-nancing statement “seriously mislead-ing”? The answer to that is not clear fromthe UCC. Under CRS § 4-9-503(a),

a financing statement sufficiently pro-vides the name of the debtor: (1) [i]f thedebtor is a registered organization, onlyif the financing statement provides thename of the debtor indicated on thepublic record of the debtor’s jurisdictionof organization which shows the debtorto have been organized. . . .

It is clear that a limited liability identifieris part of an entity’s name. Given the Col-orado Secretary of State’s new namerules,94 in which limited liability identi-fiers make entity names distinguishable,an incorrect limited liability identifiermakes the name of an organization insuf-ficient. Under CRS § 4-9-506(c), however,

[i]f a search of the records of the filingoffice under the debtor’s correct name,using the filing office’s standard searchlogic, if any, would disclose a financingstatement that fails sufficiently to pro-vide the name of the debtor in accor-dance with section 4-9-503(a), the name



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provided does not make the financingstatement seriously misleading.In a case where a debtor converts to a

different form of entity and the limited li-ability identifier in the debtor’s namechanges, the search logic of the ColoradoSecretary of State UCC records probablywould reveal the debtor under both itsconverting entity name and its resultingentity name, as well as other entities withsimilar names.This is because the searchlogic reveals the name searched andnames containing similar terms. Since adifference in the limited liability identifi-er will distinguish one entity from anoth-er, however, it does not seem safe to con-clude that the search logic will disclose afinancing statement showing the convert-ing entity’s name if the search is made inthe resulting entity’s name.The only safeway to ensure the effectiveness of a fi-nancing statement for more than fourmonths after a name change caused by aconversion is to amend the financingstatement to reflect the true name of theresulting entity.

Because of the new UCC Article 9 rulesdiscussed above, lenders now often re-quire in their security agreements that

notice be given by debtors of, among oth-er things, any change in the name or thestate of organization of the debtor. Prior toeffecting a conversion of an entity, there-fore, practitioners should look for andcomply with any notice requirements and,if necessary, when the conversion is effec-tive, file the appropriate UCC financingstatements or amendments thereto.

Letters of CreditLetters of credit should be included in

this discussion of conversions becausemany standby letters of credit have condi-tions for drawing that require statementsfrom specified persons. Under the rule ofstrict compliance,95 inconsistencies be-tween the required statement and a state-ment that can be made truthfully follow-ing a conversion may be a basis for the is-suer to dishonor drafts drawn under theletters of credit. For example, if the termsof a letter of credit require a statementfrom the “President of ABC Corporation,”the issuer of the letter of credit might notaccept a statement signed by the “Manag-er of ABC Limited Liability Company.”This is true even if ABC Limited Liability

Company is the resulting entity in a con-version of ABC Corporation and, underthe terms of the conversion, the Presidentis now the Manager. In general, however,the beneficiary of a letter of credit shouldnot be adversely affected by a conversionbecause the beneficiary remains the sameentity as before, and no transfer of the let-ter of credit takes place in a conversion.

Other Business MattersAlthough a conversion does not involve

a transfer of assets, many of the same is-sues that arise in an asset transfer or amerger may arise in the conversion.96

Thus, a certain amount of “due diligence”must be undertaken before effecting aconversion. The business matters dis-cussed above are the most likely to needattention in a conversion, but every busi-ness requires its own analysis.

CONCLUSIONConversion is a wonderful tool in the

business world. However, it is not as sim-ple as first appears. The conversion of anentity has many legal implications andshould be undertaken only with careful



thought and planning. The proper ap-provals must be obtained. The unintend-ed consequences of the conversion mustbe considered and addressed. The taxramifications must be analyzed and nu-merous business matters must be attend-ed to. Only then is it safe to do the easypart, deliver the filings.

NOTES

1.This refers to forms of entities that can beformed under current law. Entities that cannotnow be formed cannot be resulting entities ina conversion (e.g., 1931 LPs). Although thestatute does not say this expressly, presumably,any entity converted into a GP will be gov-erned by CUPA rather than the UPL. Any en-tity converted into a LP will be governed by theUPL unless it elects to be governed by CUPA,pursuant to CRS § 7-62-1104(1)(c).

2. See H.B. 02-1147, H.B. 02-1456, H.B. 03-1377, and H.B. 04-1398.

3. Article 90, Title 7 of CRS, having as itsshort title,“The Colorado Corporations and As-sociations Act.”

4.As of October 2004, there are 165 coopera-tives and 95 limited partnership associations,according to the records of the Colorado Secre-tary of State.

5. See CRS § 7-90-102(13).6. E.g., corporations not for profit,Article 40;

flume and pipeline companies, Article 43; wa-ter users’ associations,Article 44; toll road com-panies,Article 45; cemetery companies,Article47; business development corporations,Article48; and older housing preservation corpora-tions,Article 49.

7. E.g., religious, educational, and benevolentsocieties, Article 50; joint stock religious orbenevolent associations,Article 51; and church-es and religious societies,Article 52.

8.They cannot be converted under any otherprovision of Colorado law either. Some statesprovide for trusts (such as Massachusetts orMaryland business trusts) that are entities.These are included in the definition of “foreignentity” contained in CRS § 7-90-102(23) and,thus, may be either a converting entity or a re-sulting entity under Article 90.

9. See Reeves, “Partnership Status of JointVentures in Colorado,” 24 The Colorado Law-yer 2553 (Nov. 1995); Sabian and Steiner,“Part-nership Status of Joint Ventures in Colorado:Editorial Comments on CRS § 38-30-166,” 25The Colorado Lawyer 61 (Feb. 1996).

10. See CRS § 7-90-201(2).“Foreign entity” isdefined in CRS § 7-90-102(23). Note that theseconversion provisions permit what is called a“redomestication” under some state statutes.

11.As defined in CRS § 7-90-102(29.5).12. See CRS § 7-90-202(4) and the discussion

in this article regarding the effect of conver-sion.

13. CRS § 7-90-202(3).14. Id.15. CRS § 7-42-101(2).

16.See, e.g., Delaware Code § 18-212.17. Delaware Code § 18-213.18. CRS § 38-33.3-301.19. CRS § 7-90-206.20. E.g., homeowners associations must be

corporations, nonprofit corporations, corpora-tions not for profit, or LLCs under CRS § 38-33.3-301.

21. Cf. CRS § 7-90-203(4)(c)(I), dealing withmergers and providing for the most stringentprovisions to apply.

22. CRS § 7-90-201(4)(c)(I), (II), and (III).23. See CRS § 7-90-102(50), in conjunction

with subsections (4), (7), and (47).24. CRS § 7-90-201(4)(c)(III).25. CRS § 7-64-101(20) defines “partnership

agreement” in a way that makes it clear that,absent a contrary provision in the partnershipagreement, unanimous consent of the partnersis required to amend the partnership agree-ment.

26. Cf. CRS § 7-90-203(4)(c)(I), dealing withmergers and providing for the most stringentprovisions to apply.

27. In which case, approvals at both levelsare required under CRS § 7-90-201(4)(c)(I).

28. See CRS § 7-110-102.29. CRS § 7-110-102.30. See, e.g., CRS § 7-110-104.31. CRS § 7-90-201(4)(c)(I).32. For class voting, see CRS § 7-107-207,

which generally extends the foregoing princi-ples to each class entitled to vote separately.

33. See CRS § 7-111-103(5).34. See CRS § 7-112-102(6).35. CRS § 7-80-107 statutorily makes the

test for “piercing the corporate veil” as to anLLC the same as that for a corporation. CRS §7-64-1009 provides essentially the same forLLPs and LLLPs governed by CUPA.

36. Compare CRS §§ 7-30-106 and 7-126-103.

37. It is not clear whether the rights of own-ers whose liability will change can be waivedin a constituent document. Presumably, theconsent can be given in advance, in a con-stituent document or elsewhere.

38. CRS § 7-90-201(4)(a).39. CRS § 7-106-101.40. CRS § 7-90-201(4)(a).41. E.g., certain classes of owners and man-

agers are personally liable under some statetax laws.Whether any such change in liabilityis “solely by being an owner” is debatable.

42. CRS § 7-90-201(5.5).43. See CRS § 7-90-301.5.44. CRS § 7-90-201(5).45. Id.46. CRS § 7-90-301(3).47. Id.48.As a result, there will not necessarily be a

public record of the conversion.49. See CRS § 7-90-301(1).50. CRS § 7-90-202(5.5).51. CRS § 7-90-204.5(1)(a).52. CRS § 7-90-204.5(1)(c).53. CRS § 7-90-204.5(1)(b).The provision ap-

pears to be redundant in light of CRS § 7-90-

206, which provides that any conversion underArticle 90 is subject to any grant of dissenter’srights upon conversion pursuant to any appli-cable organic statute or the common law.

54. CRS § 7-90-201(6).55. Id.56. CRS § 7-90-304(2).57. The author’s view is based on consulta-

tion with the Secretary of State’s Office and theLegislative Drafting Committee.

58. See CRS § 7-90-304(4) regarding simul-taneous filings by the Secretary of State.

59. CRS § 7-90-201(6). Note that the statutedoes not require the owner’s determination tobe in writing.

60. CRS § 7-90-202(2).61. Id.62. See the discussion regarding change of

name and trade names below.63. H.B. 94-1131 effected this change in the

trade name law.64. CRS § 7-106-301.65. See CRS §§ 7-113-101 et seq.66. Cf. CRS §§ 7-80-408 (LLCs) and 7-116-

101 et seq. (corporations).67. Id.68.Treas. Reg. §§ 301.7701-2 et seq.69. Id.70. See Frost,“The Federal Income Tax Con-

sequences of Business Entity Conversions,” 26J. of Real Estate Taxation 83 (1999).

71. “Employer ID Numbers (EIN)—Do YouNeed a New EIN?” available on the IRS web-site at http://www.irs.gov/businesses/small/article/0,id=98011,00.html.

72. CRS § 7-90-601(3)(a).73. CRS § 7-90-601(3)(a), (c) and (d).74. See Water, Waste & Land, Inc. d/b/a

WESTEC v. Lanham, 955 P.2d 977 (Colo.1998).The court stated, “The ‘missing link’ be-tween the limited disclosure made by Clarkand the protection of the notice statute was thefailure to state that ‘P.I.I.,’ the Company, stoodfor ‘Preferred Income Investors, L.L.C.’” (Em-phasis in original.) Id. at 1004.

75. These types of entity include a corpora-tion, LP, LLP, LLLP, LLC, LPA, or nonprofit en-tity that has elected to file a statement of tradename under CRS § 7-71-103.

76. CRS § 4-9-316(a)(2). Note that if the con-version was accomplished by the formation ofa new entity and a merger of the Colorado en-tity into the Delaware entity, the financingstatement would lapse only after one year un-der CRS § 4-9-316(a)(3). In an Article 90 con-version, there may be a change in the debtor’slocation,but there is not a transfer of collateral.Thus, the four-month rule in subsection (2) ap-plies and not the one-year rule of subsection(3). See also Example 4 to the Official Com-ment to CRS § 4-9-316.

77. See, e.g., Leonard v. McMorris, 63 P.3d323 (Colo. 2003). See also Eismeier andDindinger, “The Alter Ego Doctrine in Colo-rado,” 28 The Colorado Lawyer 53 (March1999).

78. CRS § 38-35-106.



79.A copy of the Title Standards is availableto members of the Colorado Bar Association onthe home page of the Real Estate Law Sectionat http://www.cobar.org.They are also availablefor a fee from Attorneys’ Title Guaranty Fund,999 18th St., Suite 1101, Denver, CO 80202.

80. See discussion in this article below re-garding real property transfer taxes. The doc-umentary fee usually can be avoided by indi-cating that it is a deed for no consideration. Seealso CRS § 39-13-102(2)(a).

81. Fairway Development Co., 621 F.Supp120 (N.D. Ohio 1985).

82.The wording of a “Fairway endorsement”needs to be scrutinized because the language

is not standard. Often, such endorsements saylittle more than that coverage continues if nodissolution occurs. What the insured wants itto say, however, is that coverage continues eventhough a dissolution has occurred, because theentity is continuing the business.

83. See, e.g., Breckenridge Town Code §§ 3-3-1 et seq.; City of Aspen Municipal Code §§23.48.010 et seq.

84. CRS §§ 39-26-101 et seq.85. CRS §§ 4-9-101 et seq.86. CRS § 4-9-301.87. See CRS § 4-9-307.88. CRS § 4-9-102(a)(73).89. CRS § 4-9-307(e).

90. See id.91. See CRS §§ 4-9-310 and -501.92. CRS § 4-9-316(a)(2).93. See CRS § 4-9-307(b)(2) and (3).94.Available on the Secretary of State’s web-

site: http://www.sos.state.co.us, under “Busi-ness Center.”

95. See CRS § 4-5-108(a).96. See (in this issue) Fogler and Witwer,

“Buying, Selling, and Combining Businesses inColorado,” 33 The Colorado Lawyer 73 (Nov.2004). ■



Appendices follow on page 30.

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Nonprofit General LimitedCorporation Corporation Partnership Partnership

Corporattion

N/A Purposes: engaging in any law-ful business or activity; shouldhave nonprofit purposesOwnership: shares becomememberships or are eliminated;shareholders become membersor are taken out and nonprofitcorporation operates withoutmembersChange in liability: noneManagement: must appoint orcontinue one or more directorsand may continue or appointofficersConstituent operating docu-ments: new articles of incorpo-ration required; may continue orrevise bylaws, if any

Purposes: to carry on a busi-ness for profitOwnership: must have at leasttwo partners; shares becomepartnership interests; sharehold-ers become partners if not takenoutChange in liability: sharehold-ers who become partners assumeliability for obligations of thepartnershipManagement: board of direc-tors and officers should be elimi-nated; management is by part-nersConstituent operating docu-ments: articles and bylawsbecome, or should be replaced by,partnership agreement

Purposes: to carry on a busi-ness for profitOwnership: must have at leastone general and one limitedpartner; shares become generalor limited partnership interests;shareholders become general orlimited partners if not taken outChange in liability: sharehold-er(s) who become general part-ner(s) assume liability for obliga-tions of the partnershipManagement: board of direc-tors and officers should be elimi-nated; management is by gener-al partnersConstituent operating docu-ments: articles and bylawsbecome, or should be replaced by,partnership agreement

Nonprofit

Corporattion

Purposes: engaging in any law-ful businessOwnership: members becomeshareholders or are taken out;shares are issued to sharehold-ersChange in liability: noneManagement: must appoint orcontinue one or more directorsand may appoint or continueofficersConstituent operating docu-ments: must adopt articles ofincorporation and may continueor revise bylaws; if any

N/A Purposes: to carry on a busi-ness for profitOwnership: must have at leasttwo partners; memberships, ifany, become partnership inter-ests; members become partnersif not taken outChange in liability: memberswho become partners assumeliability for obligations of thepartnershipManagement: board of direc-tors and officers should be elimi-nated; management is by part-nersConstituent operating docu-ments: articles of incorporationand bylaws become, or should bereplaced by, partnership agree-ment

Purposes: to carry on a busi-ness for profitOwnership: must have at leastone general and one limitedpartner; memberships, if any,become general or limited part-nership interests; members, ifany, become general or limitedpartners if not taken outChange in liability: memberswho become general partner(s)assume liability for obligations ofthe partnership; no change formembers who become limitedpartnersManagement: board of direc-tors and officers should be elimi-nated; management is by gener-al partner(s)Constituent operating docu-ments: articles and bylawsbecome, or should be replaced by,partnership agreement

General

Partnership

Purposes: engaging in any law-ful business Ownership: partnership inter-ests become shares; partnersbecome shareholders or aretaken outChange in liability: partnersare relieved of liability for obli-gations of the corporationManagement: must appointone or more directors to replacegeneral partners and mayappoint officersConstituent operating docu-ments: must replace partner-ship agreement with articles ofincorporation and bylaws, if any

Purposes: engaging in any law-ful business or activity; shouldhave nonprofit purposesOwnership: partnership inter-ests become memberships or areeliminated; partners becomemembers or are taken out andnonprofit corporation operateswithout membersChange in liability: generalpartners relieved of liabilityManagement: must appointone or more directors to replacegeneral partner(s) and mayappoint officers Constituent operating docu-ments: must replace partner-ship agreement with articles ofincorporation and bylaws, if any

N/A Purposes: to carry on a busi-ness for profitOwnership: must have at leastone general and one limitedpartner; general partnershipinterests become general or lim-ited partnership interests; gener-al partners become general orlimited partners if not taken outChange in liability: generalpartners who become limitedpartners are relieved of liabilityfor obligations of the partner-ship; no change for general part-ner(s) who remain general part-ner(s)Management: management isby general partner(s)Constituent operating docu-ments: partnership agreementshould be amended to providefor limited partners

APPENDIX I:Domestic Entity Conversions—Ownership and Management Issues

(Top: Resulting Entity; Side: Converting Entity)



NonprofitLLP LLLP LLC Association

Purposes: to carry on a businessfor profitOwnership: must have at leasttwo partners; shares becomepartnership interests; sharehold-ers become partners if not takenoutChange in liability: noneManagement: board of directorsand officers should be eliminat-ed; management is by partnersConstituent operating docu-ments: articles and bylawsbecome, or should be replaced by,partnership agreement

Purposes: to carry on a businessfor profitOwnership: must have at leastone general and one limited part-ner; shares become general orlimited partnership interests;shareholders become general orlimited partners if not taken outChange in liability: noneManagement: board of directorsand officers should be eliminat-ed; management is by generalpartner(s)Constituent operating docu-ments: articles and bylawsbecome, or should be replaced by,partnership agreement

Purposes: any lawful activityOwnership: must have at leastone member; shares becomemembership interests; sharehold-ers become members if not takenoutChange in liability: none Management: board of directorsshould be eliminated; manage-ment is by one or more managersor by members as specified inarticles of organization and asappointed per the operatingagreement; officers may continueConstituent operating docu-ments: articles and bylawsbecome, or should be replaced by,operating agreement

Purposes: common, lawful, non-profit purposesOwnership: must eliminateshares; shareholders becomemembers if not taken outChange in liability: membersassume some liability for obliga-tions of the associationManagement: directors and offi-cers can continueConstituent operating docu-ments: articles of incorporationand bylaws can continue asConstituent operating documentsof nonprofit associations, butmust be made consistent withnonprofit purposes

Purposes: to carry on a businessfor profitOwnership: must have at leasttwo partners; memberships, ifany, become partnership inter-ests; members become partners ifnot taken outChange in liability: noneManagement: board of directorsand officers should be eliminat-ed; management is by all part-nersConstituent operating docu-ments: articles of incorporationand bylaws become, or should bereplaced by, partnership agree-ment

Purposes: to carry on a businessfor profitOwnership: must have at leastone general and one limited part-ner; memberships, if any, becomegeneral or limited partnershipinterests; members, if any,become general or limited part-ners if not taken outChange in liability: noneManagement: board of directorsand officers should be eliminat-ed; management is by generalpartner(s)Constituent operating docu-ments: articles and bylawsbecome, or should be replaced by,partnership agreement

Purposes: any lawful activityOwnership: must have at leastone member; memberships, ifany, become membership inter-ests; members become membersif not taken outChange in liability: none Management: board of directorsshould be eliminated; manage-ment is by one or more managersor by members as specified inarticles of organization and asappointed per the operatingagreement; officers may continueConstituent operating docu-ments: articles and bylawsbecome, or should be replaced by,operating agreement

Purposes: common, lawful, non-profit purposesOwnership: members continueif nonprofit corp. had membersunless taken out; otherwise,directors and officers becomemembersChange in liability: membersassume some obligations for lia-bilities of the nonprofit associa-tionManagement: directors and offi-cers can continueConstituent operating docu-ments: articles of incorporationand bylaws can continue as con-stituent operating documents

N/A Should be accomplished by regis-tration under CRS § 7-60-144 orCRS § 7-64-1001

Purposes: to carry on a businessfor profitOwnership: must have at leastone general and one limited part-ner; general partnership inter-ests become general or limitedpartnership interests; generalpartners become general or limit-ed partners if not taken outChange in liability: generalpartners who become partnersare relieved of liability for obliga-tions of the partnershipManagement: management isby general partner(s)Constituent operating docu-ments: partnership agreementshould be amended to provide forlimited partners and addresschange in liability

Purposes: any lawful activityOwnership: must have at leastone member; partnership inter-ests become membership inter-ests; partners become members ifnot taken outChange in liability: partnersare relieved of liability for obliga-tions of the LLCManagement: management isby one or more managers or bymembers as specified in articlesof organization and as appointedper the operating agreementConstituent operating docu-ments: partnership agreementbecomes, or should be replacedby, operating agreement

Purposes: common, lawful, non-profit purposesOwnership: partners becomemembers if not taken outChange in liability: partnerswho become members arerelieved of some liability for obli-gations of the nonprofit associa-tionManagement: partners can con-tinue to manage as membersConstituent operating docu-ments: partnership agreementbecomes constituent operatingdocument for nonprofit associa-tion but must be made consistentwith nonprofit purposes




Li

mited

Partnership

Purposes: engaging in any law-ful business Ownership: partnership inter-ests become shares; partnersbecome shareholdersChange in liability: generalpartner(s) relieved of liabilityManagement: must appointone or more directors to replacegeneral partner(s) and mayappoint officers Constituent operating docu-ments: must replace partner-ship agreement with articles ofincorporation and bylaws, if any

Purposes: engaging in any law-ful business or activity; shouldhave nonprofit purposesOwnership: partnership inter-ests become memberships or areeliminated; partners becomemembers or are taken out andnonprofit corporation operateswithout membersChange in liability: generalpartner(s) relieved of liability;limited partners: none.Management: must appoint oneor more directors to replace gen-eral partner(s) and may appointofficers.Constituent operating docu-ments: must replace partner-ship agreement with articles ofincorporation and bylaws, if any

Purposes: to carry on a busi-ness for profitOwnership: limited and generalpartnership interests becomegeneral partnership interests;limited and general partnersbecome general partners if nottaken outChange in liability: limitedpartners who become generalpartner(s) assume liability forobligations of the partnershipManagement: management isby partners; general partners:none.Constituent operating docu-ments: partnership agreementcontinues as amended

N/A

LLP

Purposes: engaging in any law-ful business Ownership: partnership inter-ests become shares; partnersbecome shareholdersChange in liability: generalpartner(s) relieved of liabilityManagement: must appoint oneor more directors to replace gen-eral partner(s) and may appointofficers Constituent operating docu-ments: must replace partner-ship agreement with articles ofincorporation and bylaws, if any

Purposes: engaging in any law-ful business or activity; shouldhave nonprofit purposesOwnership: partnership inter-ests become memberships or areeliminated; partners becomemembers or are taken out andnonprofit corporation operateswithout membersChange in liability: noneManagement: must appoint oneor more directors to replace part-ners and may appoint officers Constituent operating docu-ments: must replace partner-ship agreement with articles ofincorporation and bylaws, if any

Purposes: to carry on a busi-ness for profitOwnership: sameChange in liability: limitedpartners who become generalpartner(s) assume liability forobligations of the partnershipManagement: management isby all partnersConstituent operating docu-ments: partnership agreementcontinues as amended

Purposes: to carry on a busi-ness for profitOwnership: must have at leastone general and one limitedpartner; partnership interestsbecome general or limited part-nership interests; partnersbecome general or limited part-ners if not taken outChange in liability: partner(s)who become general partner(s)assume liability for obligations ofthe partnership; no change forpartner(s) who become limitedpartner(s)Management: management isby general partner(s)Constituent operating docu-ments: partnership agreement

LLLP

Purposes: engaging in any law-ful business Ownership: partnership inter-ests become shares; partnersbecome shareholdersChange in liability: generalpartner(s) are relieved of liabilityof obligations of the corporationManagement: must appoint oneor more directors to replace gen-eral partner(s) and may appointofficers Constituent operating docu-ments: must replace partner-ship agreement with articles ofincorporation and bylaws, if any

Purposes: engaging in any law-ful business or activity; shouldhave nonprofit purposesOwnership: partnership inter-ests become memberships or areeliminated; partners becomemembers or are taken out andnonprofit corporation operateswithout membersChange in liability: noneManagement: must appoint oneor more directors to replace gen-eral partner(s) and may appointofficers Constituent operating docu-ments: must replace partner-ship agreement with articles ofincorporation and bylaws, if any

Purposes: to carry on a busi-ness for profitOwnership: limited and generalpartners become partners if nottaken outChange in liability: limitedand general partners whobecome partner(s) assume liabili-ty for obligations of the partner-shipManagement: management isby all partnersConstituent operating docu-ments: partnership agreementcontinues as amended

Purposes: to carry on a busi-ness for profitOwnership: no changeChange in liability: generalpartner(s) who continue as gen-eral partners(s) become liable forobligations of the partnership; nochange for partner(s) whobecome limited partnersManagement: no changeConstituent operating docu-ments: changes to partnershipagreement may be appropriateto address change in liability

APPENDIX Icontinued




Purposes: to carry on a businessfor profitOwnership: limited and generalpartnership interests becomepartnership interests; generaland limited partners becomegeneral partners if not taken outChange in liability: generalpartner(s) who become partnersare relieved of liability for obliga-tions of the partnership; limitedpartners who become partners:noneManagement: management isby partnersConstituent operating docu-ments: partnership agreement

N/A Should be accomplished by regis-tration under CRS § 7-60-144 orCRS § 7-64-1001

Purposes: any lawful activityOwnership: must have at leastone member; general and limitedpartnership interests becomemembership interests; partnersbecome members if not takenout;Change in liability: generalpartners are relieved of liabilityfor obligations of the LLC; limit-ed partners: noneManagement: management isby one or more managers or bymembers as specified in articlesof organization and as appointedper the operating agreementConstituent operating docu-ments: partnership agreementsbecome, or should be replaced by,operating agreement

Purposes: common, lawful, non-profit purposesOwnership: partners becomemembers if not taken outChange in liability: generalpartners who become membersare relieved of some liability forobligations of the nonprofit associ-ation; limited partners whobecome members assume sameliability for obligations of the non-profit associationManagement: can continue or bealtered by agreementConstituent operating docu-ments: partnership agreementcan continue as constituent oper-ating document of the nonprofitassociation but must be made con-sistent with nonprofit purposes

N/A Purposes: to carry on a businessfor profitOwnership: must have at leastone general and one limited part-ner; partnership interestsbecome general or limited part-nership interests; partnersbecome general or limited part-ners if not taken outChange in liability: noneManagement: management isby general partner(s)Constituent operating docu-ments: partnership agreementshould be amended to addresslimited partners

Purposes: any lawful activityOwnership: must have at leastone member; partnership inter-ests become membership inter-ests; partners become members ifnot taken out;Change in liability: noneManagement: management isby one or more managers or bymembers as specified in articlesof organization and as appointedper the operating agreementConstituent operating docu-ments: partnership agreementsbecome, or should be replaced by,operating agreement

Purposes: common, lawful, non-profit purposesOwnership: partners becomemembers if not taken outChange in liability: partnerswho become members assumesome liability for obligations ofthe nonprofit associationManagement: partners can con-tinue to manage as membersConstituent operating docu-ments: partnership agreementcan continue as constituent oper-ating document of the nonprofitassociation but must be madeconsistent with nonprofit pur-pose

Purposes: to carry on a businessfor profitOwnership: limited and generalpartnership interests becomepartnership interests; limitedpartners become general part-ners if not taken outChange in liability: noneManagement: management isby partnersConstituent operating docu-ments: partnership agreement

N/A Purposes: any lawful activityOwnership: must have at leastone member; general and limitedpartnership interests becomepartnership interests; partnersbecome members if not takenout;Change in liability: noneManagement: management isby one or more managers or bymembers as specified in articlesof organization and as appointedper the operating agreementConstituent operating docu-ments: partnership agreementsbecome, or should be replaced by,operating agreement

Purposes: common, lawful, non-profit purposesOwnership: partners becomemembers if not taken outChange in liability: partnerswho become members assumesome liability for obligations ofthe nonprofit associationManagement: partners can con-tinue to manage as membersConstituent operating docu-ments: partnership agreementcan continue as constituent oper-ating document of the nonprofitassociation but must be madeconsistent with nonprofit purpos-es




LLC

Purposes: engaging in any law-ful business Ownership: membership inter-ests become shares; membersbecome shareholders;Change in liability: noneManagement: must appoint oneor more directors to replacemanager(s) or member-manag-er(s) and may appoint or contin-ue officers Constituent operating docu-ments: must replace operatingagreement with articles of incor-poration and bylaws, if any

Purposes: engaging in any law-ful business or activity; shouldhave nonprofit purposesOwnership: members becomemembers or are taken out andnonprofit corporation operateswithout membersChange in liability: noneManagement: must appoint oneor more directors to replacemanager(s) or member-manag-er(s) and may appoint or contin-ue officers Constituent operating docu-ments: must replace operatingagreement with articles of incor-poration and bylaws, if any

Purposes: to carry on a busi-ness for profitOwnership: must have at leasttwo partners; membership inter-ests become partnership inter-ests; members become generalpartners if not taken outChange in liability: noneManagement: manager(s), ifany, removed; management is byall partnersConstituent operating docu-ments: operating agreementbecomes partnership agreement

Purposes: to carry on a busi-ness for profitOwnership: must have at leastone general and one limitedpartner; membership interestsbecome general and limited part-nership interests; membersbecome general or limited part-ners if not taken outChange in liability: memberswho become general partner(s)assume liability for obligations ofthe partnership; no change formembers who become limitedpartnersManagement: manager(s), ifany, removed; management is bygeneral partner(s)Constituent operating docu-ments: articles of organizationand operating agreementbecome, or should be replaced by,a partnership agreement

LPA

Purposes: engaging in any law-ful business Ownership: membership inter-ests become shares; membersbecome shareholdersChange in liability: noneManagement: must appoint orcontinue one or more directors;may continue officers Constituent operating docu-ments: must replace articles ofassociation with articles of incor-poration and must adopt or con-tinue bylaws, if any

Purposes: engaging in any law-ful business or activity; shouldhave nonprofit purposesOwnership: members becomemembers or are taken out andnonprofit corporation operateswithout membersChange in liability: noneManagement: must appoint orcontinue one or more directors;may continue officers Constituent operating docu-ments: must replace articles ofassociation with articles of incor-poration and must adopt or con-tinue bylaws, if any

Purposes: to carry on a busi-ness for profitOwnership: must have at leasttwo partners; membership inter-ests become partnership inter-ests; members become generalpartners if not taken outChange in liability: memberswho become partner(s) assumeliability for obligations of thepartnershipManagement: managers andofficers, if any, removed; manage-ment is by partnersConstituent operating docu-ments: articles of associationand bylaws become, or should bereplaced by, partnership agree-ment

Purposes: to carry on a busi-ness for profitOwnership: must have at leastone general and one limited partner; membership interestsbecome general and limited part-nership interests; members become general or limited part-ners if not taken outChange in liability: memberswho become general partner(s)assume liability for obligations ofthe partnership; no change formembers who become limited partnersManagement: manager(s) andofficers, if any, removed; manage-ment is by general partner(s)Constituent operating docu-ments: articles of association andbylaws become, or should be re-placed by, partnership agreement

Nonprofit

Association

Purposes: engaging in any law-ful business Ownership: members becomeshareholders; shares issued toshareholdersChange in liability: membersare relieved of certain liabilitiesfor obligations of the corporationManagement: must appoint orcontinue one or more directorsand may appoint or continueofficers Constituent operating docu-ments: must adopt articles ofincorporation and may adoptbylaws

Purposes: engaging in any law-ful business or activity; shouldhave nonprofit purposesOwnership: members canremain members or are takenout and nonprofit corporationoperates without membersChange in liability: membersrelieved of certain liabilitiesManagement: must appoint orcontinue one or more directorsand may appoint or continueofficers Constituent operating docu-ments: must adopt articles ofincorporation and bylaws, if any

Purposes: to carry on a busi-ness for profitOwnership: must have at leasttwo partners; membershipsbecome partnership interests;members become partners if nottaken outChange in liability: memberswho become partner(s) assumeliability for obligations of thepartnershipManagement: management isby all partnersConstituent operating docu-ments: should enter into part-nership agreement

Purposes: to carry on a busi-ness for profitOwnership: must have at leastone general and one limitedpartner; memberships becomegeneral or limited partnershipinterests; members become gen-eral or limited partners if nottaken out;Change in liability: memberswho become general partner(s)assume liability for obligations ofthe partnership; members whobecome limited partners arerelieved of some liabilityManagement: management isby general partner(s)Constituent operating docu-ments: certificate of limitedpartnership and partnershipagreement needed

APPENDIX Icontinued




Purposes: to carry on a businessfor profitOwnership: must have at leasttwo partners; members becomegeneral partners if not taken outChange in liability: memberswho become partner(s) assumeliability for obligations of thepartnershipManagement: manager(s), ifany, removed; management is bypartnersConstituent operating docu-ments: articles of organizationand operating agreementbecome, or should be replaced by,partnership agreement

Purposes: to carry on a businessfor profitOwnership: must have at leastone general and one limited part-ner; members become general orlimited partners if not taken out;Change in liability: noneManagement: manager(s), ifany, removed; management is bygeneral partner(s)Constituent operating docu-ments: articles of organizationand operating agreementbecome, or should be replaced by,a partnership agreement

N/A Purposes: common, lawful, non-profit purposesOwnership: members remain asmembers if not taken outChange in liability: memberswho become owners assumesome liability for obligations ofthe nonprofit associationManagement: members cancontinue to manageConstituent operating docu-ments: articles of incorporationno longer effective; operatingagreement can become con-stituent operating agreement ofnonprofit association but must bemade consistent with nonprofitpurposes

Purposes: to carry on a businessfor profitOwnership: membership inter-ests become partnership inter-ests; members become generalpartners if not taken outChange in liability: noneManagement: managers andofficers removed; management isby partnersConstituent operating docu-ments: articles of associationand bylaws become, or should bereplaced by, partnership agree-ment

Purposes: to carry on a businessfor profitOwnership: must have at leastone general and one limited part-ner; membership interestsbecome general and limited part-nership interests; membersbecome general or limited part-ners if not taken out;Change in liability: noneManagement: manager(s) andofficers, if any, removed; manage-ment is by general partner(s)Constituent operating docu-ments: articles of associationand bylaws become, or should bereplaced by, partnership agree-ment

Purposes: any lawful activityOwnership: must have at leastone member; membership inter-ests become membership inter-ests; members become membersif not taken out;Change in liability: noneManagement: management isby one or more managers or bymembers as specified in articlesof organization and as appointedper the operating agreement;officers may continueConstituent operating docu-ments: articles of associationand bylaws become, or should bereplaced by, operating agreement

Purposes: common, lawful, non-profit purposesOwnership: members remain asmembers if not taken outChange in liability: memberswho become owners assumesome liability for obligations ofthe nonprofit associationManagement: members cancontinue to manageConstituent operating docu-ments: articles of incorporationno longer effective; bylaws canbecome constituent operatingdocument of the nonprofit associ-ation but must be made consis-tent with nonprofit purposes

Purposes: to carry on a businessfor profitOwnership: must have at leasttwo partners; membershipsbecome partnership interests;members become partners if nottaken outChange in liability: memberswho become partners are re-lieved of some liability for obliga-tions of the partnershipManagement: management isby partnersConstituent operating docu-ments: statement of registrationand partnership agreementneeded

Purposes: to carry on a businessfor profitOwnership: must have at leastone general and one limited part-ner; memberships become gener-al or limited partnership inter-ests; members become general orlimited partners if not taken out;Change in liability: memberswho become general partner(s)assume liability for obligations ofthe partnership; members whobecome limited partners arerelieved of some liabilityManagement: management isby general partner(s)Constituent operating docu-ments: certificate of limitedpartnership, registration state-ment and partnership agreementneeded

Purposes: any lawful activityOwnership: must have at leastone member; membershipsbecome membership interests;members become members if nottaken out;Change in liability: membersare relieved of some liability forobligations of the LLCManagement: management isby one or more managers or bymembers as specified in articlesof organization and as appointedper the operating agreementConstituent operating docu-ments: articles of organizationand operating agreement needed

N/A




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N/A Must file statement of conver-sion and articles of incorporation

Must file statement of conver-sion

Must file statement of conver-sion and certificate of limitedpartnership

APPENDIX II:Domestic Entity Conversions—Filing Requirements


Must file statement of conver-sion and articles of incorpora-tion; Attorney General may haveinterest in conversion

N/A Must file statement of conver-sion; Attorney General may haveinterest in conversion

Must file statement of conver-sion and certificate of limitedpartnership; Attorney Generalmay have interest in conversion

Must file statement of conver-sion and articles of incorporation


N/A Must file statement of conver-sion and certificate of limitedpartnership





Must file statement of conver-sion and articles of incorpora-tion; Attorney General may haveinterest in conversion

Must file statement of conver-sion and articles of incorpora-tion: Attorney General may haveinterest in conversion

No filing required; AttorneyGeneral may have interest inconversion

Must file statement of conver-sion and certificate of limitedpartnership; Attorney Generalmay have interest in conversion








Should be accomplished by filingstatement of withdrawal of reg-istration for a limited liabilitylimited partnership per CRS § 7-60-144(4.5) or CRS § 7-64-1001(5)



Should be accomplished by filingstatement of withdrawal of reg-istration for a limited liabilitypartnership per CRS § 7-60-144(4.5) or CRS § 7-64-1001(5)





Must file statement of conver-sion and certificate of limitedpartnership; can also be accom-plished by electing to have LPAct govern per CRS § 7-62-1103and filing certificate of limitedpartnership per CRS § 7-62-201




N/A

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Must file statement of conversionand statement of registration

Must file statement of conversion,certificate of limited partnershipand statement of registration

Must file statement of conversionand articles of organization

Must file statement of conversion;must have nonprofit purposes

Must file statement of conversionand statement of registration;Attorney General may have inter-est in conversion

Must file statement of conversion,certificate of limited partnershipand statement of registration;Attorney General may have inter-est in conversion

Must file statement of conversionand articles of organization;Attorney General may have inter-est in conversion if nonprofit pur-poses change

Must file statement of conversion;A dissolved nonprofit corporationis treated as a nonprofit associa-tion for some purposes per CRS §7-30-101.1

Should be accomplished by regis-tration under CRS § 7-60-144 orCRS § 7-64-1001



No filing required; must havenonprofit purposes





Must file statement of conversionand statement of registration;Attorney General may have inter-est in conversion

Must file statement of conversion,certificate of limited partnershipand statement of registration;Attorney General may have inter-est in conversion

Must file statement of conversionand articles of organization;Attorney General may have inter-est in conversion unless LLC hasnonprofit purposes

N/A



N/A Must file statement of conversion;must have nonprofit purposes


N/A Must file statement of conversionand articles of organization


N/A Must file statement of conversion,certificate of limited partnershipand statement of registration













Corporationsand EntitiesTaxable as

Corporations

Corporations andEntities Taxable as

Corporations

Corporations andEntities Taxable as

S CorporationsEntities Taxable as

Partnerships

APPENDIX III:Entity Conversions—Tax Treatment


Tax-exempt Entitiesunder 501(c)(3) of theIRC (treated under the “check-the-box”

regulations as corporations regardless

of state law form)

Disregarded Entitiesunder the “check-the-

box” regulations

Corporationsand EntitiesTaxable as SCorporations

EntitiesTaxable as

Partnerships

Tax-exemptEntitiesunder

501(c)(3) ofthe IRC

DisregardedEntities

N/A Accomplished not byconversion but by taxelection. Conversion ofexisting C Corporationraises special issues, e.g.,built-in gains tax of IRC§ 1374

Generally treated as ataxable transaction atboth corporate andshareholder level

Generally treated as ataxable transactionunder IRC § 337(d)

Generally treated as ataxable transaction atboth corporate andshareholder level

Generally no effect, butcorporate-level taxthereafter

N/A Generally treated as ataxable transaction atboth corporate andshareholder level, butcorporate gain passesthrough to shareholderand shareholder basisoffset for recognized cor-porate-level gain

Generally treated as ataxable transactionunder IRC § 337(d)

Generally treated as ataxable transaction atboth corporate andshareholder level, butcorporate gain passesthrough to shareholderand shareholder basisoffset for recognized cor-porate-level gain

Generally treated as atax-free incorporationunder § 351 of the IRC,unless special rulesapply (e.g., IRC § 357(c)gain)

Generally treated as atax-free incorporationunder § 351 of the IRC,unless special rulesapply (e.g., IRC § 357(c)gain). An S Corp electionis treated as an electionto be taxed as a corpora-tion under the “check-the-box” regulations

Generally, resulting enti-ty is the same tax part-nership and the conver-sion is treated as tax-free unless there is ashift in liabilities underIRC § 752

Need to apply for tax-exempt status. Entitydeemed to be treated ascorporation under“check-the-box” regula-tions

Generally treated as atax free liquidation ofthe partnership to thecontinuing owner and ataxable sale of the part-nership interests by theoutgoing partners. Rev.Rul. 99-6

Value of property devot-ed to charitable purpos-es must be preserved;otherwise private inure-ment and other taxissues



IRS says entity must re-apply for tax-exemptstatus if change in formof organization


Generally treated astax-free incorporationunder IRC § 351 unlessspecial rules apply (e.g.,IRC § 357(c) gain)

Generally treated as atax-free incorporationunder 351 of the IRC,unless special rulesapply (e.g., IRC § 357(c)gain). An S Corp electionis treated as an electionto be taxed as a corpora-tion under the “check-the-box” regulations

Generally treated astax-free partnership for-mation under IRC § 721,Rev. Rul. 99-5. May begain or loss to priorowner if sale or deemedsale of a portion of theunderlying property

Need to apply for tax-exempt status. Entitydeemed to be treated ascorporation under“check-the-box” regula-tions

N/A

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