Statutory domestication (called “conversion” in some states) is the most efficient way to move a business from one state to another. Domestication allows an LLC or corporation to transfer to a new state without business disruption and without losing its employer identification number (EIN). After the domestication is complete, the entity is no longer treated as having been organized in the original state. Instead, it is treated as though it had been formed in the state to which it has been transferred.
Statutory domestication must be authorized by the laws of both states involved in the move. To date, 43 U.S. jurisdictions have enacted laws authorizing LLCs to domesticate into the jurisdiction. These laws require that the law of the state where the entity was formed must also allow domestication. State law does not allow an entity to domesticate into that state unless domestication is also permitted in the state that the entity is coming from.
Both sets of laws must be analyzed before proceeding. Domestication is a relatively new procedure, and not all states permit it. The following states do not currently have statutory conversion or domestication procedures for LLCs:
| Kentucky | Montana | New York | West Virginia |
| Massachusetts | New Mexico | South Carolina | |
| Missouri |
In these states, statutory domestication and conversion are unavailable. To move an LLC or corporation to or from one of these states, business owners must use other methods. The three most common alternatives are forming a new entity and merging the old entity into it, operating the existing entity as an out-of-state (foreign) entity, and forming a new entity while dissolving the old one. Each approach is discussed below.
Attorney Practice Note: These alternatives can sometimes work, but they are usually more burdensome and costly than statutory domestication or conversion. Most require the entity to obtain a new EIN and, in the case of new entity formation, require assets to be retitled and bank accounts to be reopened. When authorized by the laws of both states, domestication or conversion is almost always a more efficient, less burdensome way for a business to adopt a new home state.
Forming a New Entity and Merging the Old Entity Into It
Statutory merger is the closest approximation to a statutory domestication or conversion procedure. The process involves forming a new LLC or corporation in the new state and combining the old entity with the new entity using a statutory merger. This approach offers several advantages:
- No need to dissolve the old entity. The old entity is viewed as continuing its existence through the merger with the new entity, so there is no need to dissolve it or worry about administrative dissolution.
- No need to transfer assets. The merger laws of most states provide that, upon the merger of one entity into another, the rights, obligations, and assets of the merging entity continue in the surviving entity. There is no need to transfer assets or assign contracts.
- Retained EIN. The entity may be able to retain its EIN. Keeping the same EIN avoids other complications, such as reopening bank accounts, transferring employee records, and losing benefits or accounts tied to the EIN.
Whether the entity can retain its EIN depends on its tax classification.
EIN Retention for Single-Member LLCs Treated as Disregarded Entities
A single-member LLC treated as a disregarded entity (sole proprietorship) that reports income on Schedule C of the owner’s personal income tax return may continue to use the owner’s social security number as the EIN for the new LLC, assuming no other owners are added.
EIN Retention for Multi-Member LLCs Taxed as Partnerships
A multi-member LLC taxed as a partnership that results from a merger is considered a continuation of the old LLC whose partners own more than 50 percent of the capital and profits interests in the new LLC (I.R.C. § 708(b)(2)(A)). This 50-percent rule can present challenges when combining partnerships with different owners. When the purpose of the merger is to relocate the entity to another state, however, the ownership of both entities is the same, and the 50-percent rule is always satisfied.
The new LLC can be treated as the surviving entity and a continuation of the old LLC, allowing it to keep the EIN, accounting methods, tax years, and elections of the old LLC. When the new LLC files its next tax return, it states that it is a continuation of the old LLC (I.R.C. § 708(b)(2)(A); Treas. Reg. § 1.708-1(c)(1)).
EIN Retention for Entities Taxed as Corporations
An LLC that has elected to be taxed as a corporation, or a corporation itself, may engage in a tax-free F reorganization under the Internal Revenue Code (I.R.C. § 368(a)(1)(F)). An F reorganization treats the transaction as a “mere change in identity, form or place of organization” of the entity, not as a taxable event. To qualify, the reorganization must meet several requirements:
- All ownership interests in the old entity must be distributed (or deemed distributed) in exchange for ownership interests in the new entity.
- The same persons must own all interests in the old entity immediately before the reorganization and all interests in the new entity immediately after, in identical proportions.
- The new entity may not hold any property or have any tax attributes immediately before the reorganization, other than a de minimis amount of assets needed under local law to facilitate its formation or maintain its legal existence.
- The old entity must completely liquidate (or be deemed to have liquidated) for federal tax purposes, but may retain a de minimis amount of assets to preserve its legal existence.
- The new entity must be the only acquiring entity and must hold all property that was held by the old entity immediately before the reorganization.
If the transaction qualifies as an F reorganization, the new entity succeeds to the tax attributes of the old entity and continues to operate as normal. The taxable year of the old entity does not close; instead, the new entity is treated as continuing the taxable year of the old entity (Treas. Reg. § 1.368-2(m)).
The formation of the new entity and the merger of the old entity into it should not be taxable. The old entity is treated as transferring its assets to the new entity in exchange for ownership interests and the assumption of liabilities. This deemed transfer should be exempt from tax under I.R.C. § 351, and the distribution of ownership interests should be tax-free under I.R.C. § 354(a)(1). The new entity is protected from recognizing gain or loss under I.R.C. § 1032(a). As a result, the EIN and tax attributes of the old entity should pass to the new entity.
Operating as an Out-of-State (Foreign) Entity
Business owners may choose to continue operating the entity in its original state of formation without changing the governing law. State LLC and corporation statutes do not require entities to be governed by the laws of the state where the owner resides. An owner who moves to a new state may continue to operate the entity as is.
Continuing to operate as an out-of-state entity has appeal, but only if the entity does not plan to conduct business in the new state. Whether an entity conducts business in a state is often hard to determine, and there may be no clear answer. If the entity will conduct business in the new state, it is legally required to register to do business there. The registration requirement creates two separate sets of laws governing the entity:
- The law of the original state, which has its own annual requirements for maintaining the entity; and
- The law of the new state that applies to out-of-state businesses doing business in-state.
Complying with both sets of laws adds considerable hassle to the entity’s legal maintenance and, depending on filing fees, can significantly increase the annual cost of maintaining the entity. Avoiding these dual registration requirements is a primary reason why business owners seek to move the entity to a new state.
Forming a New Entity and Dissolving the Old One
Another option is to form a completely new entity in the new state and wind down and formally dissolve the existing entity. This approach is effectively the end of the old entity.
- Obtain a new EIN. Unless the entity is a single-member LLC treated as a disregarded entity, the new entity will need a new EIN.
- Open new bank accounts. The entity must open new bank accounts using its new EIN.
- Dismiss and re-hire employees. Employees must be transferred by dismissing them from the old entity and re-hiring them through the new one.
- Transfer assets. Assignments, deeds, or other transfer documents are needed to move assets to the new entity.
- Assign contracts. If the old entity is a party to contracts that the new entity would like to preserve, the owners must negotiate with the other party for permission to assign each contract.
Whether this approach is practical depends on the business. If the entity has many employees, hard-to-transfer assets, licenses tied to the old business form, or tax items to preserve, forming a new entity may not be feasible.
Business owners should also consider the costs of dissolving the old entity. Some owners simply transition the assets to the new entity and allow the old entity to be administratively dissolved for failure to meet filing requirements. This can be risky: depending on state law, failure to properly dissolve the old entity can create liability for the owners and result in financial penalties. A better approach is to properly dissolve the old entity after the new one is formed, and factor those dissolution costs into the decision.
Choosing the Best Alternative Method to Move a Business
When domestication is unavailable, the next-best choice is usually the formation of a new entity followed by a statutory merger. This method best approximates a domestication in that it provides for an automatic transfer of assets and, in many cases, allows the entity to retain its EIN.
Our analysis tool evaluates the laws of both states and can help determine which methods are available for your specific situation.
Not every situation calls for statutory domestication. Get a personalized assessment to determine which approach makes sense for your business and location.