Businesses move from one state to another for various reasons. Transferring an LLC or corporation to another state means juggling many tasks: finding suitable space, applying for tax and other incentives, coordinating staff, informing customers, obtaining business licenses, and physically making the move. There is another important consideration — how to legally move or transfer your business entity from one state to another.
In this article, we explore the options you have to change the state of formation for your LLC or corporation. It will also discuss an alternative — which is not changing your state of formation but foreign qualifying your LLC or corporation in the state where the business will be relocated.
If you move your main corporate or LLC offices to a new state, and you decide you want to change your state of formation, you have one of four options:
To make your choice, consider the following options.
Dissolving the corporation or LLC in the old state and forming a corporation or LLC in the new state is the most expensive and complex way of transferring your LLC or corporation to a new state. Dissolution is a statutory procedure that requires the settling of debts and liabilities, including all state tax and reporting obligations, as well as other steps to wind up and liquidate. A new corporation or LLC has to be formed in the new state and the dissolved corporation’s or LLC’s assets, properties, and liabilities will have to be transferred, by contract, to the new one.
There are also federal income tax consequences. These will differ depending upon whether your corporation or LLC is taxed as a separate taxable entity (e.g., as a C corporation) or a pass-through tax entity (e.g., as an S corporation or partnership).
Shareholders who receive assets upon liquidation also recognize income if their stock has appreciated. Since S corporations are “pass-through” entities, there may be no immediate cost to the corporation or its shareholders. Liquidating an LLC will not entail any federal tax consequences as long as it is also taxed as a pass-through entity.
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Another way to formally transfer an LLC or corporation is to form the corporation or LLC in the new state and then merge the old corporation or LLC into the new one. This is a statutory transaction you will have to comply with merger provisions of the corporation or LLC laws, including filing the necessary documents in the old and new states.
The effect of a merger is that by operation of law all of the non-surviving (old state) corporation’s or LLC’s assets, properties, and liabilities become the assets, properties, and liabilities of the surviving corporation or LLC in the new state. There is no need to dissolve the corporation or LLC in the old state or to enter into contracts to transfer the assets, properties, and liabilities of the old to the new.
The easiest way to change the state of formation when moving an LLC or corporation is through a statutory transaction. In some states, this is called a conversion. In other states, it is called a domestication.
A statutory business conversion is one entity transaction. There is no need to form a new corporation or LLC in the new state or transfer any assets, liabilities or properties from one entity to another. The corporation or LLC files required documents with the old and new states to make the transaction effective.
The problem with this transaction is that it is not authorized by every state. But where it is authorized, it is a convenient way to change the formation state.
You don’t need to change your formation state just because you are moving the business to a new state. The formation state can be any state. The business owned by the corporation or LLC doesn’t have to be located there, or even be doing business there.
If you want to keep the same formation state for your corporation or LLC there is another option — foreign qualification (also known as foreign registration). A corporation or LLC can do business in one or multiple states other than the one in which it was initially formed.
However, to do business in a “foreign” state — that is, any state other than its state of formation — it has to get authority from that state’s business entity filing office (such as the Secretary of State). That’s done through a procedure traditionally known as foreign qualification. Qualification of either a corporation or LLC basically requires filing an application for authority, along with a certificate of good standing from the formation state and paying the filing fee.
Something to keep in mind in deciding whether to qualify the entity or change its state of formation is that if you qualify, you will have to comply with certain obligations of two business entity laws — those of the formation state and of the foreign state. In general, that means maintaining a registered agent, filing annual reports, and paying annual fees in both states.
There are other things to remember if your LLC or corporation moves to another state — regardless of whether you decide to change your business entity’s state of formation, or you decide to foreign qualify in the new state.
It’s important to carefully plan your business move so you aren’t missing any steps. As you can see, moving the physical location of a business to a new state has consequences for the corporation or LLC. And the person or persons who own the corporation or LLC have some decisions to make and steps to take to make sure they stay legally compliant.
Start the process today to foreign qualify.
Register your company to transact business in another state or multiple states
Foreign Qualification Starts at $219 + state fees