Moving Your Business to Another State

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Relocating Your Business

So you’ve finally decided to pack up the house, the family, and the dog and move across the country. But what about your business?

You can’t just throw it in the trailer and drag it in tow.

Whether you’re chasing new market opportunities or seeking a more favorable lifestyle for your family, moving your business to another state is a more complex process than one might anticipate.

Business Infrastructure

In this article, I make multiple references to “business infrastructure”. For the purposes of this article, business infrastructure refers to the legal and financial structures owned by—and specific to—a particular business entity. Those items include, but are not limited to:

• Tangible and intangible assets
• Contractual relationships
• Credit history
• Federal and state Tax ID’s
• Bank accounts
• Payroll accounts and unemployment account numbers
• Bookkeeping files and CRMs
• Payment processors and merchant accounts
• Any other business accounts specific to a particular entity’s Tax ID.

Below, we outline the three methods available for moving your business to another state, followed by three factors that can help determine the best option for your specific situation.

1. Dissolve and Re-Form

Essentially, you can close your business in the current state and start a new one in the state you’re moving to. This means winding down the old entity (following the dissolution process of the state) and then forming a new entity in the new state.

Pros:

• Provides a fresh start.
• Can be simpler if the business is relatively new or small.

Cons:

• Will likely require completely new business infrastructure.

2. Foreign Registration (or Foreign Qualification)

This option allows you to register your existing business as a “foreign entity” in the new state while maintaining your business registration in the original state. This means your business is recognized in two states – your original state and the new state you’re entering.

Pros:

• Allows the entity to retains its business infrastructure.
• Allows operations to continue seamlessly across multiple states.

Cons:

• Requires maintaining compliance, filings, and potential tax obligations in both states.
• Can be more administratively cumbersome and potentially more costly in the long run.

3. Re-Domestication (or Domestication)

This process allows a company to move its domicile from one state to another with minimal disruption to its operations. It transfers your entity from one state to another, typically without affecting the company’s age, credit histories, or employer identification number.

Pros:

• Allows the entity to retains its business infrastructure.
• Allows you to fully “break up” with your old state.

Cons:

• Not all states allow re-domestication.
• The process can be complex and will almost certainly require legal assistance.

Factors to Consider Before Moving Your Business

1. How Is Your Business Taxed?

Different states have different tax laws. As such, the tax structure of your business might be ideal for your old state but not your new state.

For example, S-Corporations are popular and effective in California. However, in Tennessee, S-Corporations are subject to a 6.5% excise tax on their net income.

This state tax can offset the tax federal tax benefit of the S-Corp.

Assuming the other factors are considered, you might be better of dissolving and re-forming your business if your new state’s tax laws aren’t friendly to your existing business’s tax structure.

2. Does Your Business Own Valuable Assets?

For businesses with significant assets (equipment, vehicles, etc.), the transfer of those assets can be complex and might have tax implications.

If your business is taxed as a sole proprietorship, you can likely avoid any tax implications. However, if your business is taxed as a corporation (S or C), dissolving the company is more complex.

When corporations are dissolved, the IRS requires that any assets owned by the business be treated as if they were sold at fair market value.

Most business assets will have been depreciated for tax purposes. This means that a deemed sale upon dissolution will likely result in a taxable gain for the business.

This is true even though you didn’t receive any cash for the “sold” assets!

Corporations owning assets with a significant fair market value may be better off filing a foreign registration or re-domesticating if their new state allows for it.

If your new state doesn’t have re-domestications laws, you can consider domesticating in a tax-neutral jurisdiction like Texas or Delaware and then file a foreign registration in your new state.

3. Will Your Business Continue to Operate in Your Old State?

If your business plans to maintain operations in the old state, foreign registration would be the most logical choice.

Your business will need to be registered in each state that it conducts business. “Doing business” could mean maintaining a physical location, having employees, or storing inventory.

If you plan to continue doing business in your old state, dissolving/re-forming or re-domesticating won’t help you since the old state would still require registration.

Are You Planning a Move?

Moving your business to another state requires proper planning and foresight.

It’s crucial to consult with both legal and tax professionals to understand the implications of each option in order to make an informed decision that aligns with your specific situation.

If you are moving your business to another state and need a tax professional to consult with, we would be happy to speak with you!