The what, why and how of redomestication
As accounting and tax professionals, you may (or might in the future) have clients who have wondered if they should choose a different home state for their business. After all, we occasionally hear how this state or that state is more “business-friendly” — and the tax environment stands as one of the major factors in making that determination.
So, what are some things your clients need to be aware of when considering redomestication, i.e., transferring a business entity’s charter to a different state? You can provide them with some food for thought as they make an informed decision about where they wish their businesses to be registered.
What is redomestication exactly?
The redomestication process, which I’ll also refer to as “domestication,” results in the business moving to another state. The concept of domestication is more complicated than closing an office in one state and opening a new one in another. After a company completes domestication, it ceases to exist in the state where it was initially formed. The business then must follow the laws, regulations and compliance requirements of its new home state.
Redomestication is not the same as foreign qualification. Foreign qualification involves registering a business in another state (or states) beyond the state in which it is already registered. With foreign qualification, the company retains its residence in its original state.
Why would a business want to change its domicile (home state)?
Several reasons entrepreneurs might find redomestication attractive include:
1. An opportunity to reduce their tax burden
Business income tax rates and fees vary by state. Corporate tax rates can vary widely. For example, New Jersey currently imposes as much as 11.5% tax on a corporation’s income, while North Carolina’s rate is just 2.5%. And then there are South Dakota and Wyoming with no corporate income or gross receipts tax. Nevada has become a popular state to incorporate in because of its lack of state corporate income tax, franchise tax and personal income tax.
Also, business owners who do not want the hassles of collecting, reporting and remitting sales tax may seek to register their companies in a state that does not levy a state sales tax. The five states that do not collect sales tax include Alaska, Delaware, Montana, New Hampshire and Oregon.
According to the Tax Foundation’s 2021 State Business Tax Climate Index, the 10 states with the best tax structures for businesses are:
- Wyoming
- South Dakota
- Alaska
- Florida
- Montana
- New Hampshire
- Nevada
- Utah
- Indiana
- North Carolina
2. Business friendly laws
Many corporations form in Delaware because it is known for its pro-business court system, the Court of Chancery. The court is dedicated explicitly to matters of business law and has a reputation for its flexibility. Other states have legal and regulatory environments favorable for entrepreneurs, too. According to the Small Business & Entrepreneurial Council’s Small Business Policy Index 2019, the most entrepreneur-friendly states from a policy standpoint are:
- Texas
- Nevada
- Florida
- South Dakota
- Wyoming
- Indiana
- Utah
- Alabama
- Arizona
- Washington;
- Tennessee
- Colorado
- Ohio
- Michigan
- North Carolina
3. Privacy laws
These days, with identity theft and cyber-security rampant issues, business owners understandably want to protect their personal information. The requirements for making business owners’ personal information accessible to the public vary by state. Some states, such as New Mexico, Nevada and Wyoming, do not require that ownership information be made public.
Basic steps to domesticate an LLC or corporation to a new state
In states that allow redomestication, the process generally involves the following steps:
- Apply for domestication in the new state by filing Articles of Domestication (or Articles of Continuance), providing a Certificate of Good Standing from the current home state, and providing a copy of the (completed but not filed) Articles of Dissolution form for the current home state.
- Dissolve the business in the state where it was chartered originally.
Tip: It can be dangerous to dissolve the business in the original state before the new state has officially approved the business’s domestication filing. If the new state rejects the domestication request for some reason, a business owner would be left with no active business if they filed for dissolution in their original home state.
Essential details to keep in mind
Not all states support domestication
While businesses can redomesticate from any state, not all states allow companies to redomesticate to their jurisdictions. So, if a business wants to relocate its domicile to a state that doesn’t allow redomestication, it will likely need to dissolve the entity in its current home state and register a brand-new business entity in the desired home state. That is a more complex (and usually more costly) process than filing domestication documents.
The states that allow businesses from out-of-state to domesticate within their borders have their own rules and processes for accomplishing the change.
States allowing domestication
- 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
Redomestication has legal ramifications as well as tax consequences
When a client tells you they’re considering domesticating their business to a different state, it’s critical that they not only tap your expertise on the tax and financial impacts but also get guidance from an attorney on the legal ramifications. Gaining knowledge about how redomestication will affect a business and its owners is the best path to making an informed decision that will have optimal outcomes.