How Do You Move a Company to Another State?
The analogy I like to use with clients, is that when you form a company in one state, it’s like having a child in that state. You can certainly bring that child to a new state, but that child’s birth certificate will always be of the state where he or she was born. A company is similar. You cannot simply move your company from one state to another, as a company formed in one state will always be a company of that state, without doing things carefully (depending on which states are involved). If you formed a New Mexico limited liability company, it will always be a New Mexico limited liability company, even though you moved to Texas or New York. Because of this, you can create some unintended tax consequences, as well as uncertainty around liability issues, if you’re not very careful when you move a company.
If you’re moving to another state, and you want to take your company with you, you have three (maybe four) options:
- Foreign LLC. File your company as a “Foreign Company” in your new state, keeping your existing company “as is.”
- Asset Purchase. Form a new company in your new state, have that company acquire all the assets (and liabilities) of your old company, and then close (i.e. dissolve) your old company in the original state it was formed.
- Merger. Same as #2 above, but before you dissolve your old company, “merge” it into the new company in your new state.
- Domestication. Finally, same as #3 above, instead of “merging,” you perform what’s called a “foreign entity conversion” (only supported in some states — and the states need to cooperate).
Each of these options as its pros and cons.
Move a Company by Filing a “Foreign Company” in you new state
This first option is the easiest and least expensive. What it means, technically, is that your company is registered in at least two states. It’s first registered in the original state it was formed in. If you created a New Mexico LLC, that NM LLC still exists. The foreign filing is NOT A NEW COMPANY. What it means, is that your NM LLC is now registered in your new state. If you moved from New Mexico to Texas, and you picked this option, you would have a NM LLC that is a Foreign LLC in TX. If you want help, we have low-cost, flat-rate fees for a Foreign LLC or Foreign Corporation.
The benefits to this, is that it’s very inexpensive and can be setup quickly. There are a number of problems, however, associated with this approach. First off, you’re still registered in New Mexico. If you do ANYTHING that can create a tax liability in NM, you’re still liable for that tax. For example, if your NM LLC is taxed under Subchapter S, you will still need to file a tax return in the State of NM. If you have any clients in NM, you will still need to collect NMGRT, report and pay NMGRT for NM-based clients.
The second issue is that technically, even though you have a “Texas Foreign LLC” in my example above, it’s still a “New Mexico LLC”. If you’re not careful with your contracts, you could be subject to NM law when you want to be subject to TX law. This can have unintended liability issues.
If you elect this option, please DO NOT FORGET TO HIRE A QUALITY, TRUSTWORTHY registered agent for your original company. You want to make sure your records are accurate, so that you continue to receive legal notices to your company’s registered agent from the old state. Note we can provide this service, see L4SB Registered Agent Services.
Asset Purchase: Forming a new company, dissolving the old company
This is perhaps the most popular way to move a company, and many business leaders gravitate towards this approach when they go off on their own without consulting an attorney.
What happens here, is that you simply abandon your old company and start over. The disadvantage to this approach, is that you’re abandoning the old company’s FEIN and any credit it may have established and built-up over the years.
The advantage is this approach generally straightforward — but you need to be careful. We attorneys will discourage clients from simply abandoning a company formed in any state. Some states have specific procedures to be followed to close a company properly, and if not followed, can accumulate fines and penalties over time, which could become quite extreme. If you want help, we do have low-cost, flat-rate fees to help you dissolve a LLC.
Additionally, if you don’t close your company properly, the company (and you personally) can run the risk of “default judgements” from lawsuits that were served on a registered agent in your old state that wasn’t updated when you moved. If a lawsuit named you or other owners in the lawsuit personally, you could personally be liable for a default judgement in your old state — a judgement that will probably not be able to be removed — and the plaintiff could then seek to come after you in your new state.
Therefore, if you’re going to move a company with this approach, please follow these steps:
- Figure out the proper steps to close your company in your old state. This varies state-by-state, as well as the type of entity you’re trying to close. Note that “dissolving” your company is just one step necessary to close your company. Other steps may include obtaining a tax clearance certificate from your state’s taxation department, calling a vote of all the owners, paying off all liabilities, and more. To make sure you do this right, we strongly encourage you to talk to a competent business attorney in your state.
- Form a new company in your new state. You want to form the new company BEFORE dissolving the old company. This is because you want to formally transfer the assets and liabilities of the old company to the new company, while the new company is still in existence. We can help form your new limited liability company (or LLC) or Corporation, if you want professional assistance.
- Follow those steps identified in the first step. It bears repeating: Don’t formally dissolve the old company, until you’ve formally transferred all the assets and liabilities to your new company. To transfer assets and liabilities, you want a formal “Asset Purchase Agreement” and “Bill of Sale” that outlines the purchase price, assets and liabilities being transferred. This is important for tax reasons, and helps to establish a cost-basis for the new company. Beware trying to transfer asset that are encumbered, or trying to walk away from liabilities — simply trying to put assets into a new company can expose the new company to claims of “fraudulent transfer” or “successor liability.”
- Obtain a new FEIN. You cannot use the old FEIN for your new company. Don’t even try. Just get a new FEIN, and open up new bank accounts, merchant accounts, etc.
- Obtain a new business license. As appropriate for the new state. Don’t forget that different states have different laws about a great many things. If you’re a contractor in one state, do not assume your contractor license will transfer over. Also, don’t assume a “city license” is the same thing as a contractor’s license, or the way the new state handles licensing is anywhere close to what the previous state did. This is a good time to consult with a business attorney in your new state.
- Don’t forget to notify the IRS. If you have a corporation, be sure to file Form 966 for corporate dissolution / liquidation. If you have a LLC taxed as a partnership, make sure you check the “final return” checkbox on your last tax return for the company. Finally, read this letter from the IRS regarding Canceling or Closing an EIN for a Closing Business: Canceling an EIN and Closing Your Business Account.
Merging old company into a new company
The third option preserves the FEIN and credit established of the old company. The downside is that it costs more, because it involves all the steps of the above (i.e. “Forming a new company, dissolving the old company”), but it also includes filing appropriate “Articles of Merger” and paying the appropriate fees in the new state, so that the old company “mergers into” the surviving entity, that entity being the new company formed in the new state.
This will usually require proving the company is in “good standing” where it’s coming from, so if you owe back taxes or the company is “not in good standing,” you will want to fix this.
Follow the same steps as above, except you want to perform the merger before closing and dissolving the old company. When done, the old company will no longer exist, and the new company in the new state will become the company that takes over everything from the old company.
Move a Company by Domestication: Foreign entity conversion
Some states (not all) have what’s called “Foreign Entity Conversion Statutes” on the books. There is very little uniformity between the states on this, so you need to do your research — and this is where a local business lawyer in your target state would be helpful.
If a state permits this, there may be limitations on the type of entity that may be converted (i.e. a LLC or Corporation), and some states have limitations on where the incoming company is from. Again, you will need to do your research.
If such an option is available in the state you want to move to, and your company is permitted (i.e. type of company and the state where it’s domesticated), then you can follow that state’s procedure to do convert your company from State X to State Y.
The benefit of this is it is usually less expensive than the merger, and you preserve the FEIN, the company’s credit, etc.
Don’t Be Overwhelmed! Let L4SB Move Your LLC for You!
L4SB now offers a flat-rate, low-cost service offering to move a company from one state to another. You can learn more, see pricing, compare options and order from the following link:
This service is experimental — it’s really hard to calculate all the different pricing and availability, given the options depend greatly on what you want and the states involved. Please pardon our dust!
[MODIFIED: This article was modified on June 25th, 2019, to address additional IRS considerations and the possibility of foreign entity conversion.]