How to Move an LLC to a New State

LLC owners that move to another state often want to move their business with them. While there are several ways to move a business to a new state, LLC domestication is a popular option. Domestication allows the owners to change the governing law of the LLC without disrupting ongoing business operations. This article discusses LLC domestication and compares it to other alternatives.

What is LLC Domestication?

Domestication is a legal process that allows an LLC to change the governing law that applies to the LLC. When the domestication process is complete, the law of the original state no longer governs the LLC. For example, an LLC formed initially as a California LLC under California’s LLC act can domesticate the LLC to Texas. After the domestication, the LLC is governed by Texas law instead of California law.

Why Domesticate an LLC?

LLC domestication changes the law that governs the LLC without changing the business entity’s form. The LLC remains an LLC but becomes governed by the law of a different state. There are several reasons to change the LLC’s governing law:

• Owner relocation. When the owners move to a new state, they often want to move the LLC with them. If the owners do not plan to continue to conduct business in the original state, moving the LLC allows the owners to coordinate the law that governs their LLC with the law that governs them personally.
• Avoid multiple filings. If an LLC is organized in one state and does business in another, the LLC must keep up with two sets of legal requirements. If the owner no longer does business in the original state, moving the LLC to the state where it does business eliminates the hassle of multiple filings.
• Dissatisfaction with original state law. If the LLC was formed in a state with onerous legal requirements, the owners might want to get out from under the law of the original state and into a more business-friendly LLC state.
• Income tax savings. An LLC may pay state income tax if it has sufficient business activities (nexus) to the income-taxing state. If the LLC no longer conducts business in that state, moving the LLC to the new state can break the taxable nexus, allowing the LLC to discontinue income tax payments to the old state.
• Local professional network. Domestication also keeps the LLC local and makes it easier for the owners to find attorneys and other professionals in their state of residence.
• Better choice of law. If the law of the new state is more advantageous to the LLC, moving the LLC to the new state can provide better legal opportunities for protection and business strategy.
• Simplicity. Because LLC domestication preserves the LLC’s existence, there is no need to transfer employees, assets, or licenses to a new LLC. This simplicity makes domestication attractive to LLCs with many employees, assets that cannot be easily transferred, entity-specific licenses that cannot be assigned, or tax items to preserve.

Each of these reasons make LLC domestication an attractive alternative for owners that want to move the LLC.

What are the Benefits of LLC Domestication?

Compared to the alternatives, LLC domestication can move the LLC to the new state without disrupting business operations. LLC domestication has several benefits:

• Same EIN. The LLC keeps the same EIN and reports taxes as it always has. There is no need to file multiple returns for multiple LLCs or update the EIN with the bank or in other LLC records.
• Business continuity. LLC domestication avoids disrupting business operations. The domesticated LLC continues to operate in the same way as the original LLC.
• Same bank accounts. LLC domestication can avoid the need to open new bank accounts. Although the LLC may want to notify the bank of the change, the LLC can usually continue to use the same bank accounts and operations.
• Same taxpayer. The LLC continues to be treated the same for tax purposes. It may continue to use its employer identification number (EIN) and file taxes as it did before the domestication.
• Same contracts. The LLC may continue its existing relations with business partners, investors, and vendors. There is usually no need to update or assign contracts to a new business entity.
• Same employees. There is no need to fire the existing employees and move them to the new LLC. The LLC continues to exist, so the employees remain employed with the same LLC.

LLC domestication has important legal consequences, but few practical consequences. The seamless transition from one state to another often makes LLC domestication more appealing than alternatives.

When is LLC Domestication Available?

LLC domestication is only available if it is permitted by the laws of both the state that the LLC is moving from and the state that the LLC is moving to. Each state that allows LLC domestication requires, as a condition of the domestication, that domestication is clearly permitted under the law of the other state. Domestication is permitted in 37 U.S. states.

What if LLC Domestication is Unavailable?

If one or both states disallow LLC domestication, the LLC has three options:

1. Operate the LLC as an out-of-state LLC. State LLC acts do not require LLCs to be governed by the laws of the state where the owner resides. Because state law does not require the LLC to follow the owner to a new state, an owner that moves to a new state may continue to operate the LLC as is without changing the governing law.
2. Form a new LLC and merge the old LLC into it. The owners may form a new LLC in the state the business is moving to, then use a statutory merger procedure to merge the old LLC into the new LLC. After the merger, the old LLC ceases to exist and its assets and liabilities become assets and liabilities of the new LLC.
3. Form a new LLC and dissolve the old LLC. This option is similar to the previous one, except that (instead of merging the old LLC into the new LLC) the owners manually transfer all assets, employees, contracts, and accounts to the new LLC, then dissolve the old LLC.

What is the LLC Domestication Process?

The LLC domestication process is not uniform. Each state that permits domestication has its own requirements, and the laws of both the original formation state and the law of the new state must be satisfied. Although the terminology and process differ from state to state, domesticating an LLC generally requires these steps:

1. Draft a plan of domestication. The LLC attorney must draft a plan of domestication. As the name suggests, a plan of domestication is a plan for the domestication/conversion process. It authorizes the remaining steps required for domestication. Because state LLC acts differ in the information that must be included in the plan of domestication, careful drafting must ensure that the plan meets the requirements of both state LLC acts.
2. Approve the plan of domestication. The plan of domestication must be approved by the LLC members as required by the LLC acts of both states. To show approval and formally adopt the plan, each member usually signs the plan of domestication.
3. Draft documents for original state. Each state requires a domestication document to carry out the plan of domestication. Depending on state terminology, this document may be called a certificate of conversion or articles of domestication. The original state may also require a certificate of surrender or similar documents to notify the public that the LLC will no longer conduct business in the original state.
4. Draft documents for new state. As with the original state, a certificate of conversion or articles of domestication must be prepared under the plan of domestication. In addition to the domestication filing, a formation document—often called a certificate of formation or articles of organization—must also be filed with the new state to form the new entity. In some states, the formation document must include details about the original LLC.
5. File domestication documents with both states. Once the domestication documents are prepared, they must be filed with both states. While there is a trend toward allowing the domestication documents to be filed online, many states require the documents to be manually submitted and reviewed by an examining agent. The LLC attorney may need to communicate with the examining agent about the filing, and post-filing clean-up work is not unusual.
6. Pay required fees. Each state has fees that must be paid in connection with the domestication. These fees can vary greatly by state. To move an LLC from Florida to Texas, for example, the Texas filing fees are $600. Florida only charges $25.
7. Draft remaining formation documents for domesticated LLC. The domestication paperwork only moves the LLC to the new state. To be properly formed, the LLC still needs the remaining documents to provide for its operation and governance (the second step of the two-step LLC formation process). These documents include a well-drafted operating agreement and an organizational resolution for the new LLC.

What are the Tax Effects of LLC Domestication?

Because an LLC domestication is simply a change in governing law, it has no federal tax consequences. The LLC may continue to use the same EIN and file its taxes as it always has.

Although there are no federal tax consequences to consider, there may be state-law tax consequences to keep in mind. For example, Texas law requires the franchise taxes to be paid or the new LLC to be responsible for the unpaid franchise taxes. This requirement is satisfied by obtaining a certificate of franchise account status from the Texas Comptroller or—more commonly—to include a statement in the LLC domestication documents that makes the new LLC responsible for any of the old LLC’s unpaid franchise tax obligations.