Companies aren’t stationary. They move from one state to another, usually to lower the cost of doing business and/or to provide a better quality of life for owners and employees. No one really knows how many businesses relocate to different states each year, but certainly many do. Relocating a company isn’t always a simple process.
When a business moves, there are important things to address: finding suitable space in the new state, applying for tax and other incentives from the new state or city (e.g., local property tax abatements), working with staff for a smooth transition to the new location, keeping customers informed, acclimating yourself with the new location and, of course, physically making the move. But there’s one more important thing to decide: What to do about your business’s organization.
Sole proprietorships and partnerships simply move and register to do business by filing a DBA in the new location. But if you are a corporation or a limited liability company (LLC), business entities that are creatures of state law, you need to make certain decisions and take formal actions. Here are your options, depending on which type of entity you are. Your decision will rest on matters of convenience, cost and, most importantly, taxes.
When a corporation moves its corporate offices to a new state, it must decide how to proceed. There are three options:
- Continue as a corporation in the old state and register as a foreign corporation doing business in the new state. (A foreign corporation doesn’t mean you are from overseas; it simply means the corporation was organized in a different state.)
- Dissolve the corporation in the old state and form a corporation in the new state.
- Do a reorganization where a corporation is formed in the new state and the old corporation is merged into it.
Which option is better? There’s no single answer. Your choice of action depends on the states involved–where you are moving from and where you are moving to, and other matters. Consider the following factors when relocating a company:
Ongoing franchise fees
If you maintain the old corporation and register to do business in the new state, you must pay duplicative annual franchise taxes. Since every state has annual fees, you pay a minimum fee to your old state as well as a fee to the new one. You may not owe any income taxes to the old state (above the minimum fee) because you no longer conduct business there, but you have double the number of returns to file (and any related accounting costs attributable to this fact).
However, if you incorporated in Delaware or Nevada because of unique factors (e.g., pro-business climate in these states), you may wish to continue the corporation’s existence in its original state and register as a foreign corporation in your new state. For example, if you formed the corporation in Nevada, there are only nominal annual fees there. You can continue to be a Nevada corporation; you become a foreign corporation in your new state.
Federal tax issues
Liquidation of the corporation may result in income taxes to the corporation and its shareholders. For example, when a C corporation with appreciated assets liquidates, the corporation must recognize income and the shareholders who receive the assets upon liquidation also recognize income, assuming their stock has appreciated. Since S corporations are “pass-through” entities, there may be no immediate cost to the corporation or its shareholders from a liquidation.
A reorganization for a C corporation can be entirely tax free. There is no tax on the merger of the old corporation into the new one–the old corporation effectively goes away and ceases to exist.
If you use a reorganization, you can continue to use your employer identification number (EIN) for the newly merged company. Also, the corporation continues to use the same basis and holding periods for its equipment and other assets. In effect, 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.
Generally, in the case of most small- and mid-sized businesses, attorney L. William Fishman of McCarthy Fingar, LLP in White Plains, NY (www.mccarthyfingar.com) advises them to use a tax-free reorganization, merging the old corporation into the new one. There is too much burden and costs to maintaining an existence in two states and liquidation can produce onerous tax consequences–but each situation is unique and needs customized evaluation.
Also consider the impact of a dissolution or merger on existing benefit plans, such as retirement plans.
If you dissolve the corporation–whether it is C or S corporation–and form a new one or you merge it into a new corporation, you must go through the formalities of dissolving the old corporation. The specifics depend on the state where you had the old corporation. Generally, it requires the preparation of documents, papers or forms for corporate dissolution, which are filed with the old state.
Limited liability companies that relocate from one state to another face similar choices to corporations. However, in the case of LLCs, the choices are even greater on how to handle the relocation from an organizational standpoint.
- Continue the LLC in the old state and register to do business as a foreign LLC in the new state.
- Liquidate the LLC in the old state and form an LLC in the new state.
- Form an LLC in the new state and then have members (owners) contribute to it their membership interests from the original LLC.
- Form an LLC in the new state and merge the existing LLC into it.
Maintaining the LLC in the old state and becoming a foreign LLC in the new state means duplicate annual fees. It can also complicate tax filing and reporting for the LLC and all of its members.
Liquidating an LLC does not entail any federal tax consequences. Since the LLC is a pass-through entity, the LLC does not report any gain from the liquidation.
Merging the LLC from the old state into an LLC formed in the new state is viewed as a continuation of the old LLC. No new federal EIN is required. And there are no immediate tax consequences as long as the members of the LLC from the old state continue to own at least a 50% interest in the capital and profits of the LLC in the new state.
Note: Technically, the LLC in the new state must obtain a new EIN, which would be used only for a few days–until the merger is completed.