In this final post of our conversion series, we’ll cover what you need to know to help your clients move their business from one state to another.
Your customers may have many reasons for moving their business to another state: better market opportunities, more prospective customers, or access to a more skilled workforce, to name a few. Or your client chooses another state’s small business tax breaks or incentives for small businesses. Reasons for moving can be personal: to be closer to extended family, cheaper housing (or the cost of living), or a better climate.
Whatever the reason, your business client may not understand that the ease or complexity of moving their company to another state depends on the organization’s legal structure.
Sole proprietorships and partnerships
Moving a company to another state is easier for clients moving to “informal entities” such as sole proprietorships and partnerships. Sole proprietorships and partnerships do not need to be registered with the government when they are formed. However, they are required to terminate any existing local business licenses and permits and then apply for new ones in the new state and municipality they move to. Your customers must cover other business obligations, such as paying other debts, such as sales and employment taxes.
If a sole proprietorship or partnership operates under an assumed name—such as a (DBA)—the owner must remove the name from the Foreign Office. If company owners want to use a DBA in the new state, they must do a name search and register the name in the new state. Also, if the company’s business bank does not have a branch in the new state, they must close their business account and find a new bank to open it again. Finally, the business activity must be notified to the Internal Revenue Service (IRS) to ensure that the Federal Tax ID or Federal Employer Identification Number (EIN) on file reflects the updated business address. Customers must use Form 8822-B to report a change of address.
And of course, if the move is mid-year, your client will need to file tax returns in both states.
Corporations and LLCs
Since corporations and limited liability companies (LLCs) are required to be registered in the state in which they are established, the process is a bit more complicated. Once your clients decide to move their corporations or LLCs to a new state, they have two options. Either 1) dissolve the company in its original state and reform in the new state or 2) keep the original state as the company’s home state and register as a foreign state in the new state.
Filing foreign qualifications makes sense if your client still plans to do business in the state they left and the state they are moving to. If so, your client should contact the new state’s foreign affairs office to understand the exact process for foreign qualification. Typically, your customers can apply for a certificate of authority online or by mail and pay the appropriate fee. Some jurisdictions require proof that the company is in good standing in its home state, meaning it complies with incorporation protocol and has paid its taxes.
Your client’s detailed information about the company, such as the corporation’s name, list of corporate officers, state of residence, stock information (eg, number of shares authorized, etc.), local mailing address, and registered agent. Registered agents are persons or companies authorized to receive service of process (legal documents and government notices) on behalf of a company.
However, if your client does not intend to conduct business in the home state, it makes more sense for them to permanently close the business there and register a new corporation or LLC in the new state. Although business protocols vary by state, most states require:
- All board members in a corporation or LLC must agree to the closing and move to another state. Also, the agreement must be recorded in the minutes of the meeting and signed by all parties.
- Incorporated entities must also file a “certificate of termination” or “articles of termination” with the Secretary of State. Again, before a state can dissolve a company, the business must be in good standing.
- The corporation or LLC must pay all of the company’s debts, and any remaining assets must be distributed to the members/owners. How the LLC files its taxes determines whether taxes are payable on the distributed assets.
If the company is permanently closed in the previous state, the business owners must re-register in the new state by obtaining a business name, filing articles of incorporation, and obtaining the necessary business licenses and permits.
Legally changing or living at home
Another option for changing the company’s incorporation is a statutory transaction called a conversion or domestic exchange; However, not all states offer this option.
Conversion/domestication (also called reincorporation) provides relief from restarting the legal entity and forming a new LLC or corporation in the new state. After the business completes the conversion/house process, it no longer exists.
In states that allow reinstatement, the process is straightforward. Companies can apply for change/residence by submitting articles of residence – or continuity – in the new state. Typically, the company must provide a certificate of good standing from the original state of incorporation and a copy of the incorporation form from the old state. Once an amendment is accepted in the new state, the company will issue articles of dissolution and dissolve the business in the old state.
States that allow homesteading include:
- Arizona
- California
- Colorado
- Delaware
- District of Columbia
- Florida
- Idaho
- Indiana
- Kansas
- Kentucky
- Louisiana
- Massachusetts
- Maine
- Mississippi
- Nebraska
- New Hampshire
- New Jersey
- Nevada
- Pennsylvania
- South Carolina
- South Dakota
- Texas
- Utah
- Virginia
- Washington
- Wisconsin
- Wyoming
Payment requirements
In most cases, when a business hires workers in a state, the employer is required to register the company with that state’s unemployment and unemployment office. Employers must comply with the rules and regulations that cover employees in each state where the employee earns money for the company, even if the business is not physically located in the state. Payroll tax responsibilities include reporting the employee’s income taxes to the state and contributing to payroll taxes such as Social Security and Medicare. Every state requires employers to contribute to the state’s unemployment insurance tax (UI). UI is a federally-mandated, state-administered program that provides temporary payments to unemployed workers whose employment status is not attributable to their actions.
Some states have reciprocal agreements for multi-state employers. In those states, taxpayers who live in one state and work in another can apply for a tax exemption, which gives them relief from paying taxes in both states.
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Your customers should plan their business activities carefully. They can help by educating them on the steps required to move their business to a new state.Nellie Canop is a passionate entrepreneur, small business professional and mother of four. She is the CEO CorpNet.comTrusted source for business incorporation, LLC filing and corporate compliance services in all 50 states. Nellie and her team recently launched an affiliate program for accountants, bookkeepers, CPAs and other professionals to help streamline the business integration and implementation process.
