To form a business, you must file a charter document with the Secretary of State. This legally creates your business and establishes its residence within that state. But what should you do if you want to move your business to another state?
Domestication is a process that shifts your company’s charter to a different state, altering its residence.
Domestication is more complex than simply closing an office in one state and opening a new office in another. Domestication will officially dissolve your business in one state and domicile it elsewhere, making your business subject to the laws, regulations, and compliance requirements of your new home.
Let’s take a look at how domestication works.
Domestication or Foreign Registration?
Domestication shouldn’t be confused with foreign registration. Foreign registration is the process of applying for the authority to do business in another state. You can register in every state in the country and not change your charter state. Microsoft, for example, operates in every state but maintains a corporate headquarters in its charter state: Washington.
If Microsoft domesticated to Oregon, however, it would no longer be a Washington-domiciled corporation. Instead, it would be chartered in Oregon and need to apply for foreign registration in order to do business in Washington.
How to Domesticate to Another State
Not all states allow domestication, so the first step is determining whether or not it is possible in the state you want to relocate to. Every state has its own unique domestication process. To determine what that process is, you must check with the Secretary of State in the state where you are domesticating to. Be aware that some states, like California, allow domestication...but only from other states which also allow it. You cannot, for example, domesticate to California from New York, because New York has no domestication law.
You can navigate through all 51 Secretary of State websites to ascertain the exact domestication requirements, as well as annual fees, taxes, and compliance obligations.
While the exact process differs from state to state, the general outline is basically the same: applying for domestication in a new state, followed by dissolving your business in your charter state. This order is of the utmost importance: domestication first, followed by dissolution.
The worst thing that can happen during this process is to submit your dissolution before your domestication paperwork has been accepted. If your dissolution is processed and your domestication application is rejected on a technicality, your company will no longer exist anywhere.
Most states will require the following documents for a domestication application:
- Articles of Domestication or Articles of Continuance (from the new state)
- Certificate of Good Standing (from your charter state)
- Copy of Not Yet Filed Articles of Dissolution (from your charter state)
A Certificate of Good Standing is obtained from your charter state’s Secretary of State office. This document validates that your company has paid all of its state taxes and fees. A copy of your Articles of Dissolution (not filed yet!) indicate that you are going to close up shop once the domestication is processed.
Thoughts About Compliance
Domestication will have a direct impact on the annual fees, taxes, and compliance requirements your business will have to manage every year. It makes little sense to relocate your company because of onerous taxes in your charter state, only to discover that your new home levies even greater annual fees. This is where due diligence really pays off.
Not every state requires the filing of an annual report. For states that do, filing fees range greatly. Some states charge no fee at all. Others charge hundreds of dollars.
Filing times also differ. California requires annual reports from corporations, but biennial reports for LLCs. Pennsylvania, on the other hand, requires a report once every ten years.
Fees and Taxes
State taxes vary wildly. Corporate taxes, individual taxes, and sales taxes are not the only considerations. Many states, for example, levy special franchise taxes in addition to standard taxation.
Nevada, for example, imposes a $200 Business Privilege Tax. Delaware levies a variable Franchise Tax upon corporations based upon the company’s authorized stock; the minimum fee is $175 but can reach as high as $180,000.
Business compliance is more or less comparable across state lines, but some states require unique stipulations. While it’s unlikely that these oddities would keep you from domesticating there, it is important to be aware of their existence.
Washington State, for example, requires almost all entities to file for a Washington Business License. Not really a license at all, the WBL is issued through the Business Licensing Service but is actually a registration with the Department of Revenue that allows businesses to manage state taxes.
LLCs domesticating to Arizona will need to be aware of the State’s publication requirement, which provides that all LLCs must place a notice in a local newspaper stating that the business has been registered in Arizona.
Being aware of oddities like these will keep you from being assessed penalties for compliance violations.
Like many business decisions, domestication is one that requires a fair amount of due diligence. Research will help you navigate this process smoothly, with fewer snags along the way.