People move for better weather, economic opportunities, to be closer to extended family and even for tax incentives. If you own an S-Corporation, we will discuss how moving the business to another state can affect you.
You have several options to consider when moving an S-Corporation to another state including:
- Setting up a new S-Corp in the new state and then merge the old S-Corp into the new one
- Keeping the current S-Corp and registering another entity in the new state
- Closing your current S-Corp and then starting a brand new corporation in the new state
- Domesticating your entity to the new state
Form a New Corporation or LLC and Merge with the Old
For a small business owner merging their new corporation or limited liability company (LLC) with the old entity is an attractive option. The business and its owners may move to a new state and have no presence in the old state. In this situation it is important that you do not leave the business formation active in the old state. Doing so will avoid having to pay yearly fees or taxes to a state where the business no longer operates.
Another benefit is that you are able to keep the federal tax id number and business accounts as is. It also prevents having to update vendor contracts and legal documents which can be time consuming and expensive.
Keep Current Business Formation and Register in Another State
Some owners may want to just establish their business in another state. This is a solution when you have a presence in both states such as offices or warehouses.
You may hear the term foreign qualification when trying to register a business outside of the state in which it was originally formed. The new state LLC is referred to as a foreign LLC. In the tax world a foreign corporation is an entity doing business outside of the country. Foreign in this case does not mean international. It just means that the foreign entity was formed outside of that state.
Most states will require that you submit a Certificate of Good Standing which can be obtained from the Secretary of State.
The drawbacks of setting up a foreign LLC are that you will likely have additional fees and filing responsibilities each year. For example, in California an active LLC could cost you $800 in annual filing fees. Even if you are not a corporation or LLC you still may have to obtain local business licenses to conduct business. If you have employees in a new location, you will also have to deal with employment taxes, withholding, workers compensation and other compliance issues.
Close Business and Register in Different State
Another option is to close the business in the current state and start a new business in another state. This is helpful if you want to keep your permanent business address in your original state and do business temporarily elsewhere.
There are some issues that you should be aware of first. If you decide to shut down the old business you risk having to set up a new tax id number, payroll tax accounts, bank accounts, etc. This kind of move may also affect the credit rating that the business has built up.
Domestication and Conversion
Perhaps the easiest way to move your LLC or corporation to a new state is by domestication or conversion. Domestication is the process of re-establishing your business in a new state while retaining its original entity structure. It allows for a smooth transition to doing business when moving to another state without having to start a new entity from scratch.
Domestication, however, is not allowed in every state and some states will only allow it if the state in which the original entity was formed also allows domestication.
As a business grows the owner(s) may find that setting up an LLC or corporation may benefit them. A conversion happens when a business changes its legal structure.
Any outstanding taxes for the business should be paid and related filings submitted. You may contact the Secretary of State’s office or visit their website to check the status of the business.
If you plan on domesticating into another state, the business will need a registered agent. A registered agent is a representative that must be on record to receive legal notifications or letters for the business. The owner of the business may be the registered agent. However, the registered agent’s name and address is publicly available so many business owners will hire a third-party company for corporate compliance services.
Other Questions and Concerns
What are the potential tax implications when transferring an LLC to another state?
On a federal level owners pay tax on all their earnings regardless of the state it was earned. However, there is a term in the tax world called effectively-connected income. This simply means income based on the location of where it was earned. If you earn income in multiple states expect to pay tax or file income tax returns in multiple states.
Will I need to obtain a new Employer Identification Number if I am domesticating my LLC to another state?
No. Your tax ID number or EIN covers your activity in all 50 states in regards to federal tax filings. This means that you can use your current EIN to file your federal payroll tax returns such as your Form 941. However, if you move your current LLC or corporation to another state you may have to obtain new account numbers for your business to file state returns.
What Must the Business Owners do to Prepare?
If a corporation is moving to a different state the board members should approve of the transition and the decision should be recorded in the meeting minutes. All board members should sign to show their agreement.
If the business is an LLC all members should sign a formal document to confirm.
Do We Have to Contact the State We Are Moving From?
Before moving your LLC or corporation be sure to be up-to-date in your previous state. Pay any outstanding taxes and submit tax returns or documents so that you can be in good standing.
What if I Want to Just Shut Down My S-Corp But Continue to Operate as a Sole Proprietor?
We made a different post to explain how to revoke your S-Corp election.
Summary
Moving your LLC or corporation to a different state is something that many business owners will eventually face. There are several ways to do it and a variety of factors involved in the decision. It is always best to consult with an attorney before making a business move. Good advice will help you to avoid a serious headache down the road.