By Heather Huston, Assistant Service Manager, BizFilings
Sometimes companies must move from one state to another often to lower the cost of doing business or provide a better quality of life for owners and employees. A business move means juggling many tasks: finding suitable space, applying for tax and other incentives (e.g., local property tax abatements), coordinating staff, informing customers, obtaining business licenses, and physically making the move. There is another important consideration: how to relocate your formal business entity.
If you’re thinking about moving your business into another state, there are many things to consider. If you formed an LLC or corporation to own the business, and your LLC or corporation is formed under the laws of the state your business is moving out of, you may want to consider changing your formation state to the state where the business will be located.
Or, to give you an example, you own a New York LLC and the business is a candy store located in New York. You then decide to close up the New York candy store and open one in New Jersey. You may want to own a New Jersey LLC instead of a New York LLC.
In this article, we’ll explore the various ways you can change your business entity’s state of formation. It will also discuss an alternative — which is not changing your state of formation but foreign qualifying (also known as foreign registering) your LLC or corporation in the state where the business will be relocated.
How to change a corporation’s or LLC’s formation state
If you move your corporate or LLC offices to a new state, and you decide you want to change your state of formation, you have one of three options:
- Dissolve the corporation or LLC in the old state and form a corporation or LLC in the new state
- Do a reorganization, where a corporation or LLC is formed in the new state and the old corporation or LLC is merged into it
- Enter into a statutory conversion/domestication.
To make your choice, consider the following factors:
Dissolution and formation
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 changing a state of formation. 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 separate taxable entity (e.g., as a C corporation) or a pass-through tax entity (e.g., as an S corporation or partnership). For example, when a C corporation with appreciated assets liquidates, it must recognize income.
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.
Another way to change the state of formation 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 so the merger provisions of the corporation or LLC laws will have to be complied with, 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 is through a statutory transaction. In some states, this is called a conversion; in other states, it is called a domestication.
This is a 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.
Foreign qualification: an alternative to changing the state of formation
You don’t need to change your formation state just because the business is moving its location 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 every state.
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.
Compliance obligations involved with changing the formation state or foreign qualification
Here are some things to remember when a place of business moves to a new state – regardless of whether you decide to change your corporation or LLC’s state of formation, or you decide to foreign qualify in the new state.
Documents will have to be prepared and filed. Dissolution, formation, merger, conversion, domestication, foreign qualification — all of these require the preparation and filing of documents. Many businesses opt to use a service provided by a company, such as BizFilings, that will prepare the appropriate paperwork and submit it to the Secretary of State.
- Appoint a registered agent. You will have to appoint a registered agent who resides in or has an office in the new state. Many corporations or LLCs will appoint a professional registered agent like BizFilings because of its expertise in handling the time-sensitive and critical documents that it will be receiving on the company’s behalf. This is especially useful when foreign qualifying because BizFilings can provide the registered agent in both the formation state and qualification state.
- Obtain necessary business licenses and cancel unnecessary ones. You will undoubtedly need to obtain the necessary business licenses to do business in the new state. Determining which licenses are needed can be a daunting task because you have to consider state and local requirements — and these requirements will vary based upon the type of business you operate.
- BizFilings can also help with this task. We research all the business licenses and permits for your business, support you during the filing process, and ensure you are in compliance with registration requirements so you can focus on running your business. And since business will no longer be done in the old state, you will also want to cancel the licenses you have there.
- Update state records to notify of change of formation state. Changing the state of formation is a significant change. And where your corporation or LLC is on a public record as being formed in the old state, you will need to update those public records to indicate that it is now a corporation or LLC of the new state.
And also remember to update all public records, and notify insurers, banks, customers, contracting parties, etc. of the new business address. You should do this regardless of whether you decide to change the formation state or decide not to change the formation state and qualify the corporation or LLC instead.
So, as you can see, moving the physical location of a business to a new state has consequences for the corporation or LLC that owns the business. 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.