A partnership may decide to incorporate for many reasons. A corporation protects its shareholders from the business’s liabilities while a partnership does not. A corporation is also often better suited to obtain outside investors. Both partnerships and corporations are subject to state law, so the conversion process will vary. Consult your state’s partnership and corporation laws before attempting to convert your business.
Review the partnership agreement. A partnership agreement is a written contract made between the partners when they formed the business regarding how the partnership was to be structured and managed. The agreement may contain information regarding the process for getting the partnership to dissolve and then reform as a corporation.
Read More: General Partnership Laws & Regulations
Hold a shareholder vote to dissolve the partnership and incorporate. If the partnership does not provide a method for voting to convert the business, you will need to rely on the law of your state to determine the dissolution process. Many states require that all of the partners must agree to dissolution.
Wind up the partnership business. Many states require that prior to dissolving the partnership, you and your partners complete all of the partnership business and settle all partnership debts. Record all financial transactions in the partnership’s financial records, and then close the books.
Determine each partner’s share of assets. The partnership agreement will most likely provide a method for calculating each partner’s share of the business. Most states assume that a partnership will share profits and losses equally, including during dissolution, and will only allow for an adjustment to a partner’s share of the assets based on past personal distributions to and contributions of the partners. So, for example, if Mark and John both contributed equally to the business but Mark took a $1,000 distribution from the partnership, John will get the first $1,000 of the assets’ value distributed to him and the remainder will be divided between the two equally under the default rule.
Complete and submit the articles of incorporation to the appropriate state office. Many times the incorporating state’s secretary of state will have a blank form you can download from its website that you can use to preparing your business’s articles of incorporation. Most states will require a filing fee, ranging from $100 to $1,000 depending on the state.
Draft corporate bylaws. The corporate bylaws define how the corporation will operate and make significant decisions. The bylaws must be approved by a shareholder vote.
Appoint the board of directors. The board of directors is responsible for hiring the corporate officers, such as the chief executive officer (CEO), and defining the long-term strategic direction of the business. The board of directors must be approved by a shareholder vote.
Allow partners to buy shares of stock in proportion to their intended ownership interest in the company. The shares of stock represent a unit of ownership in the business. The cash and property used to acquire the stock is used by the corporation to develop its business.
When dissolving or incorporating a business, consider using a licensed attorney or online third-party document provider to help you prepare the necessary documentation.
John Cromwell specializes in financial, legal and small business issues. Cromwell holds a bachelor's and master's degree in accounting, as well as a Juris Doctor. He is currently a co-founder of two businesses.