Sometimes businesses must move from one state to another. Businesses often do this because the new state offers a better business environment, more attractive state tax laws (e.g., local property tax abatements), or more favorable employment laws, among other reasons. Legally, there are a few ways to relocate a business, and businesses must take into account a few important considerations.
The requirements to move a business into another state vary depending on the legal structure of the business. Sole proprietorships and partnerships have it a bit easier than LLCs and corporations, and generally may just move into the new state and file a DBA, obtain the requisite business licenses, and comply with local tax laws. Moving a corporation or LLC may be a bit more complex, and there are a few ways to do so.
Moving a Corporation
Corporations have three options; they can continue as a corporation in the old state while filing as a foreign corporation doing business in the new state; they can dissolve the corporation in the old state and form a new corporation in the new state; or they can do a reorganization by filing a new corporation in the new state and merging the old corporation into it. There are a few considerations when deciding which option to choose.
Ongoing State Fees. If the corporation is maintained in the old state and it files as a foreign business in the new state, it will have to pay a fee to both the old state and the new state (e.g., CA’s $800 minimum franchise tax)
Federal Tax Issues. Dissolving/liquidating the coporation has tax implications for the corporation and its shareholders. For instance, if a C corporation with appreciated assets liquidates, it will need to recognize income and pay taxes on it. Further, the shareholders who receive assets upon liquidation will need to recognize income if their stock has appreciated. Since S corporations are “pass-through” entities for tax purposes, there may be no immediate cost to the corporation or its shareholders in this situation.
Reorganization. For C corporations, reorganization can be entirely tax free because there is no tax on the merger of the old corporation into the new one.
Dissolution Costs. If you dissolve your business, you will need to go through the formalities required by the Secretary of State, which may differ from state to state. This usually involves filing the proper paperwork and paying any outstanding taxes or dissolution fees.
Moving an LLC
Limited liability companies have similar ways to handle the move organizationally. The LLC can continue business in the old state and register as a foreign business in the new state, which, as with corporations, means paying fees in both states. This can also complicate the tax situation for both the company and its members. The LLC can also liquidate in the old state and start fresh in the new state. This doesn’t entail any tax implications for the LLC itself because it is a pass-through entity, so it does not report any gain from liquidation (the members may need to recognize income here, though). The owners/members can form a new LLC in the new state and contribute their interests from the old LLC to the new one. Lastly, the owners/member of the LLC can form an LLC in the new state and merge the old LLC into it. This is considered a continuation of the old LLC and a new EIN is not required. There are also no immediate tax issues with this option as long as the 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.
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About the Author:
Dallas P. Verhagen is a business attorney and a partner at Verhagen | Bennett LLP. To learn more about Dallas, please click here.
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© 2017 Dallas P. Verhagen — This article is for general information only. The information presented should not be construed to be formal legal advice nor the formation of a lawyer/client relationship.