Moving to another state as a business owner should always prompt the question: Should I move my company? The process of moving your company to another state is normally called domestication. To add some confusion, some states also call it conversion, and I have heard people also refer to it as a company transfer. Regardless, moving your company is a huge consideration.
Why do I need to domesticate?
When an entity is formed, a legal person is created. Meaning that entity can have legal rights and is subject to legal obligations. Now in realty, we know no actual person exists. This “legal person” is a legal make-believe constructed by state law. However, it is a very useful construct. These entities can be used to run business, own property, sue and be sued, and provide countless other long-lasting benefits to the owners of that entity, and society as a whole.
Once these entities are created under state law, they are continuously governed under the laws of the state of their formation. They can do business in other states, as a foreign entity, but for their existence and governance, they are ultimately subject to the laws of their formation state.
Here is the important part. If the state law allows, an entity can move its domicile to a new state, and be governed by that new state as if it had been formed there even though it had not. Many states even allow the same company structure, and same original date of formation.
Why should I want to domesticate?
There are many reasons someone may want to move their company to a new state: annual registration fees, migration of business opportunities, moving closer to a key client or supplier, etc. I normally see three main reasons,
Regulation is too high in the original state of formation
Taxes are too high in the original state of formation
Principals of the business are moving, and they want to take the company with them. (the most common)
Domestication vs Foreign Registration?
Do not be confused by the term “foreign,” or confuse domestication with foreign registration. As used in this context, it simply means out of state, not out of country. A Foreign registration is the process of applying for the authority to do business in a state other than the state your company was originally formed (Please see my blog: “SHOULD I REGISTER MY OUT OF STATE ENTITY IN FLORIDA”).
Your entity can register as a foreign entity in every state in the country and not change your originally state of formation (state of “domicile”). Large companies with a national or global presence do this all the time.
Can I keep operations in my original state of formation?
Yes, a domesticating entity can normally keep operations in the state of its original formation and do business there as a foreign entity registered to do business in the state. However, if you are keeping operations in your original state, you may not need to domesticate at all.
If you just want to keep a small office or minor operations in the original state, and are moving the main operations to a new state it may make sense to domesticate. But, if most of your operations are held in the original state after domestication, it may not make sense to move. Consult your tax preparer to see if the tax advantage makes sense, and speak with an attorney that routinely handles domestications, such as our attorneys at Forward.
When I move my company, do I need to change my IRS tax ID (EIN)?
Usually not. Most of the time domestication includes keeping the same IRS tax ID (EIN). You should always talk to your tax preparer about reporting the changes with your next tax filing.
Do all states allow domestication?
No, they do not. A small number of states do not allow domestication. However, these state laws change continually over the years, so you should always hire an attorney to review the current state law before you start the process of domestication. This is to ensure that the laws from both the original state of formation and the target state allow domestication, and that the laws of both states are followed throughout the process.
Is it a complicated process?
Domestication can be complicated, since you have to work with the laws of two states to make sure it is properly completed. You must also draft the required documents for both states, and make sure you receive authorization from the parties having authority such as the owners, managers, or board of directors. It is much more complex process than simply closing an office in one state and opening a new office in another.
Further, to change the domicile, your entity must first be in good standing with the original state of formation. If the entity is not in good standing, you must bring it to good standing by completing the necessary filings, paying all the fees and fines that have accumulated, and/or file reinstatement (if it was administratively dissolved).
Do not eliminate your entity by accident.
Domesticating your company requires careful planning and timing. Normally, the process looks like this:
- Have the domestication approved from your original state of domicile, and then
- Dissolve your entity or change it to a foreign entity doing business in that state, while at the same time, have the domestication accepted in the new state.
Unfortunately for the DIY-er, there are many ways to get this wrong. One of the worst is to have your dissolution accepted before your domestication paperwork has been accepted. If your dissolution is processed and your domestication application is rejected (for whatever reason) your company will no longer exist in either state.
You will likely need new articles (charter).
Because you are going to set up your company in a new state as if it had originally been formed there, it will be necessary for you to have new articles for that state that comply with that state’s laws. I suggest you use this as an opportunity to redraft articles that fit the future of your company (please see my blog “WHAT ARE ARTICLES OF INCORPORATION, AND DO I NEED THEM?”), and if you have not properly documented your formation or governance over the years, get everything cleaned up now.
Conclusion.
Domestication can be a great tool to move your company from one state to another, but rather complicated waters to navigate. There are some aspects of corporate governance business owners could try to DIY, but domestications should not be one of them. If you find yourself questioning if you should domesticate your entity, reach out to us today to learn more.