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.
Different businesses, different moves
Sole proprietorships and partnerships simply move and register to do business by filing a DBA in the new location. If you are a C corporation, S corporation or a limited liability company (LLC), the process isn’t that simple. You need to make certain decisions and take formal actions. Your choice will depend on your business entity and the associated benefits, costs and—most importantly—taxes.
Moving a corporation
If you move your corporate offices to a new state, you have one of three options: continue as a corporation in the old state and register as a foreign corporation doing business in the new state (undertake foreign qualification in the new state); dissolve the corporation in the old state and form a corporation in the new state; or do a reorganization, where a corporation is formed in the new state and the old corporation is merged into it. To make your choice, consider the following factors:
- Ongoing state fees. If you maintain the old corporation and register to do business in a new state, you must pay duplicative annual report and/or franchise taxes. You’ll pay both a fee to your old state and a fee to the new one. If you incorporated in Delaware or Nevada, you were probably already foreign qualified to transact business in the state where you were located (making you a foreign corporation in that state). In this case, you can register as a foreign corporation in your new state and end your foreign corporation status in the previous state.
- Federal tax issues. Liquidation may result in income taxes to the corporation and its shareholders. 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.
- Reorganization. For a C corporation, this can be entirely tax-free. There is no tax on the merger of the old corporation into the new one. It’s as if there had been no change for federal tax purposes, but the merged corporation does cease to exist in its original state.
- Dissolution costs. If you dissolve your business—whether C corporation or S corporation—and either form a new one or merge it into a new corporation, you must go through the formalities of dissolving the old one. The specifics depend on the state where you had the old corporation. Generally, it requires document preparation (dissolution papers or forms), a filing with the old state and paying any outstanding taxes and dissolution fees.
Moving an LLC
Limited liability companies that relocate face similar choices to corporations but with more options for handling things organizationally:
- Continue the LLC in the old state and register to do business as a foreign LLC in the new state. Doing so means duplicate annual report and/or franchise tax fees. It can also complicate tax filing and reporting for the LLC and its members.
- Liquidate the LLC in the old state and form an LLC in the new state. Liquidating an LLC does not entail any federal tax consequences. Since the LLC is a pass-through entity, it does not report any gain from liquidation.
- Form an LLC in the new state and have members (owners) contribute membership interests from the original LLC.
- Form an LLC in the new state and merge the existing LLC into it. This is viewed as a continuation of the old LLC and no new federal EIN is required. There are also no immediate tax consequences, provided LLC members from the old state continue to own at least a 50% interest in the capital and profits of the LLC in the new state.