GT Alert

New Florida Law Will Impact All Business Entities Seeking Merger and/or Conversion

January 2006

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Prior to the enactment this year of new Florida laws HB595 and SB1056, the Florida statutes permitting the merger of partnerships, limited liability companies (LLCs) and other unincorporated business entities with one another, and with corporations, was somewhat limited. In addition, Florida laws permitting the “conversion” of one kind of business entity into another kind of entity were even more limited. Remember that the difference between a merger and a conversion is that a conversion involves only one entity, rather than two or more entities, as in the case of a merger. Specifically, Florida law permitted mergers involving corporations, limited partnerships and limited liability companies, and certain kinds of conversions involving domestic limited and general partnerships and certain conversions of another business entity (but not a corporation) into a LLC. Delaware and Nevada have for some time permitted these types of transactions, and with fewer conditions and restrictions than those that formerly applied in Florida. Gregory M. Marks (of Greenberg Traurig’s Miami office), who acted as the Chair and Reporter of the Florida Bar committee that drafted the new laws, said that the lack of such “user-friendly“ merger and conversion laws in Florida was encouraging businesses and investors to go to Delaware, Nevada and other states to organize and transform their business entities there rather than Florida. He added that some Florida businesses were also engaging in two or three-step transactions, whereby Florida entities would first be changed into non-Florida entities in order to take advantage of the more liberal merger or conversion statutes in the other states. Transactions involving these multiple steps are usually more complicated, and require additional layers of tax reporting, foreign entity qualification and multiple annual reporting and accounting responsibilities that would not exist if the transformation could be achieved with a single-step merger or conversion. Florida hopes that the changes in the new laws will encourage entity formation in Florida where the business and investment activities will actually occur, and maybe even be another incentive for non-Florida organizations to change into Florida entities.

The new laws generally take effect as of January 1, 2006. Existing limited partnerships will need to elect to be covered by the new limited partnership act (that was adopted by the Legislature in the same bills containing the new merger and conversion rules) in order to take advantage of these changes. While the new laws will make it much easier for business entities to “morph” from one form into another, this deceptively simple process should only be undertaken after careful review of the significant income tax issues that can arise when doing so. In the eyes of the tax law, a single-step conversion or a merger will still be “broken down” by the IRS into multiple “deemed transfers” involving the assets, liabilities and ownership shares of the “before and after” business entities that are involved in the process. A vivid example of how this works can be seen in the case of a one-step or “formless” conversion of a corporation into an LLC. While this can be accomplished by filing a simple certificate with the Florida Department of State under the new rules, the IRS will nonetheless view this transaction as a liquidation of the corporation, followed by the contribution of its assets and liabilities by it shareholders into the resulting LLC. The “deemed liquidation” of the corporation could result in significant tax liabilities for the corporation and its shareholders, an unfortunate result when using the simple process available under the new laws without seeking proper tax and legal advice. With proper advice, it is possible to structure conversion and merger transactions in a way that avoids or minimizes the adverse tax consequences that might result in those kinds of cases, even though the forms filed with the Department of State and much of the other legal documents would remain the same for “non-tax” purposes.

This Alert was written by Gregory M. Marks in the Miami office. Please contact Mr. Marks at (305) 579-0587 or your Greenberg Traurig liaison, if you have any questions regarding the subject matter of this Alert.

© 2006 Greenberg Traurig

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