On May 8, 2023, New Jersey Governor Phil Murphy signed into law Senate Bill S142 (now P.L.2023, c. 38) (the “Act“), which modifies applicable business filing statutes contained in the New Jersey Business Corporation Act by adding conversion and domestication provisions across all business entity types. By enacting the Act, New Jersey reciprocates conversion statutes of other states and becomes a more attractive place for the incorporation of businesses by simplifying changes in entity type.
New Jersey law previously did not permit either “conversion” of business entities or “domestication” of out of state entities to a New Jersey business corporation, despite other states authorizing such actions in their own jurisdictions.
Conversion and Domestication
The process of conversion involves an entity converting from one type of business entity to another type (e.g., a corporation to a limited liability company or vice versa). Domestication is the process of an out-of-state business entity converting to a domestic New Jersey corporation. The Act now permits both types of actions for businesses.
Specifically, a New Jersey corporation may now convert into other entity types such as a partnership, limited liability company, statutory trust, business trust or association, real estate investment trust, common-law trust, national association, or any other unincorporated business, not including a sole proprietorship. Conversely, other entity types, including foreign businesses, may convert to a domestic corporation.
Business Entity Type Selection Considerations
The Act modernizes the business entity selection process for businesses for purposes of corporate reorganizations and business planning. It will no longer be necessary to form a new entity and merge the old entity into it, which typically may trigger negative change of control or similar covenants in contracts such as loans and lease agreements. However, businesses must consider the potential tax consequences of an entity change, particularly as the change from a corporation to another business entity type may trigger taxation corresponding to the converting corporation’s appreciated assets at the time of conversion. Furthermore, it is unclear at this time whether the Act was intended to permit foreign professional entities to domesticate their businesses in New Jersey.
Required Filings
The process for conversion and domestication each require various specific filings with the State of New Jersey, Division of Revenue and Enterprise Services in the Department of the Treasury or other state offices as may be designated by law.
The Act is scheduled to take effect on November 4, 2023.
Garfunkel Wild is available to guide domestic and foreign businesses with respect to the above-referenced rules and any applicable required filings.
Should you have any questions regarding the above, please contact the authors or the Garfunkel Wild attorney with whom you regularly work, or contact us at [email protected].