In the final article in the conversion series, we reveal what you need to know to help your clients move their business from one state to another.
Your clients may have many reasons to move their business to another state: better market opportunities, more leads, or access to a more skilled workforce, to name a few. Or your client may prefer another state’s small business tax breaks or incentives given to small businesses. Reasons for moving can be personal: closer to a larger family, cheaper housing (or cost of living), or even a better climate.
Whatever the reason, your business clients may not understand that the simplicity or complexity of moving a company to another state depends on the legal structure of the entity.
Sole proprietorships and partnerships
For clients operating “non-entities” such as sole proprietorships and partnerships, moving a company to another state is relatively straightforward. Sole proprietorships and partnerships do not need to be registered in the state when they are established. However, they must terminate any existing local business licenses and permits and then apply for new ones in the NSW and municipality where they moved. Your customers also have other business obligations, such as paying outstanding debts such as sales and employment taxes.
If a sole proprietorship or partnership is operating under a pseudonym—doing business as a (DBA)—the owner will need to withdraw that name from the Office of the Secretary of State. If a company owner wants to use a DBA in the new state, they need to do a name search and reserve the name in the new state. Additionally, if a company’s commercial bank does not have a branch in NSW, they will need to close their commercial accounts and find a new bank to reopen them. Finally, the IRS must be notified of the business’s actions to ensure that the federal tax ID number or federal employer identification number (EIN) on file reflects the updated business address. Customers should report a change of address using Form 8822-B.
Of course, if the move is in the middle of the year, your client must file tax returns in both states.
Corporations and LLCs
The process is a bit complicated as corporations and limited liability companies (LLCs) need to be registered in the state in which they are incorporated. Once your client decides to move their corporation or LLC to a new state, they have two options. They can either 1) dissolve the company in Wonju and apply for reform in NSW, or 2) keep Wonju as the home state of the company and apply for foreign status in NSW.
Applying for foreign eligibility 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 must contact the NSW Secretary of State’s Office for the correct process for obtaining foreign status. Typically, your clients can register online or by mail for a certificate of authorization and pay the appropriate fee. Some states require proof that the company is in good standing in its state, meaning it complies with a company registration agreement and has paid taxes.
Your client will need to provide details about the company such as company name, list of company officers, domestic status, stock information (e.g. number of shares authorized, etc.), local mailing address and registered agent. A registered agent is an individual or company authorized to receive process service (legal documents and government notices) on behalf of the company.
However, if your client does not intend to do business in the original state, it makes more sense for them to permanently close the business there and then register a new corporation or LLC in the new state. While business closure agreements vary by state, most states require the following:
- All board members of the corporation or LLC must agree to close down and move to another state. Additionally, the agreement should be recorded in the minutes and signed by all parties.
- Legal entities must also file a “certificate of termination” or “article of dissolution” with the Secretary of State. Likewise, before the state dissolves the company, the business must be in good standing.
- A corporation or LLC must also repay all debts belonging to the corporation and any remaining assets must be distributed to members/owners. The way the LLC files its tax returns determines whether or not the distributed assets are taxable.
Once the company has permanently closed in the previous state, the business owner must re-register in NSW by retaining the business name, filing articles of incorporation and obtaining the required business licenses and permits.
Legal conversion or naturalization
Another option for changing the incorporation status of a company is through a statutory transaction called conversion or naturalization; however, not all states offer this option.
Conversion/domestication (also known as re-domestication) frees the entity from having to start over and set up a new LLC or corporation in its NSW. After the business has completed the conversion/domestication process, it no longer exists in its previous state.
In states that allow re-domestication, the process is simple. The company applies for conversion/naturalization in NSW by submitting a naturalization clause or a continuation clause. Usually, the company must provide a copy of the original state of incorporation certificate of good standing and the old state dissolution clause form. Once the reorganisation has been approved in NSW, the company will dissolve its old state business by filing a bylaw of dissolution.
Countries that allow domestication include:
- District of Columbia
- New Hampshire
- New Jersey
- South Carolina
- South Dakota
- the state of Wisconsin
In most cases, whenever a business hires workers in a state, the employer must register the company with that state’s Treasury Department and unemployment office. Employers must follow rules and regulations that cover employees in each state where the employee makes money for the company, even if the business is not physically located in that state. Payroll tax responsibilities include reporting employee income tax to the state and paying payroll taxes such as Social Security and Medicare. Each state also requires employers to pay that state’s unemployment insurance tax (UI). UI is a federally mandated state-run program that provides temporary payments to unemployed workers whose employment status was not caused by their actions.
Some states have reciprocal agreements with multistate employers. In these states, taxpayers who live in one state and work in another state can claim a tax exemption, which exempts them from paying taxes in both states.
Your clients need to plan their business initiatives carefully. You can help by educating them on the steps required to move their business to NSW.Nellie Akalp is a passionate entrepreneur, small business expert and mother of four.She is the CEO of the company Enterprise Network, a trusted resource for business registration, LLC filing, and business compliance services in all 50 states. Nellie and her team recently launched a partnership program for accountants, bookkeepers, CPAs and other professionals to help streamline business registration and compliance processes