LLC Domestication and Conversion

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—also called conversion—is a legal process that allows an LLC to change the governing law that applies to the LLC.¹ When the domestication process is complete, the law of the original state no longer governs the LLC.

Example: An LLC formed initially as a California LLC under California’s LLC act can domesticate (convert) the LLC to Texas. After the domestication, the LLC is governed by Texas law instead of California law.

Reasons for LLC Domestication

LLC domestication is a popular tool to transfer an LLC to a new state. An LLC domestication changes the law that governs the LLC without changing the form of the business entity, providing a seamless transition to the new state. The LLC remains an LLC but becomes governed by the law of the new state. LLC owners may want to change the LLC’s governing law for several reasons:

• Owner Relocation. When the owners move to a new state, they often want to move the LLC with them. As long as they 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.
• Access to Local Professionals. Domestication keeps the LLC “local” and makes it easier for the owners to find attorneys and other professionals in their state of residence.
• 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, discussed below. 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 statute.
• State Tax Savings. An LLC owner that moves to a new state may no longer have a taxable connection (nexus) with the old state. Moving the LLC to the new state can save state income taxes or other LLC taxes in the old state.

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.

Benefits of LLC Domestication

Compared to the alternatives (discussed below), LLC domestication can move the LLC to the new state without sacrificing continuity of the business. LLC domestication has several benefits:

• Same Taxpayer. Domestication does not change the LLC’s employer identification number. The LLC continues to exist and report taxes as it always has.
• Same Business Operations. LLC domestication avoids disrupting business operations. The domesticated LLC continues to operate in the same way as the original LLC. There is no need to move employees, transfer licenses or other assets, or change business contracts.
• 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 and file taxes as it did before the domestication.
• Same Contracts. The LLC may continue its existing relations with its employees, investors, and vendors. There is usually no need to update or assign contracts to a new business entity.

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 other alternatives.

Alternatives to LLC Domestication

LLC domestication is the preferred way to move an LLC to a new state, but it is not always available. If either of the two states involved does not have statutes permitting domestication, then the LLC cannot domestication to the new state. In that scenario, the LLC owners should consider one of the alternatives to LLC domestication.

How to Domesticate an LLC

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. We discuss the full LLC domestication process in our LLC Domestication or Conversion Checklist. While the details may change depending on the law of one or both states, the process generally includes the following:

1. Draft Plan of Domestication. The domestication process begins a plan of domestication (also called a plan of conversion in states that use conversion terminology). As the name suggests, a plan of domestication is a plan for the domestication process. It authorizes the LLC to take the 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. The LLC owners must approve and sign the plan of domestication before the LLC files anything with the state.
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, articles of domestication, or a related term. 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 conversion 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 prior 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. See How Much Does It Cost to Move an LLC to Another State? for more information about the costs of LLC domestication.
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. These documents include a well-drafted operating agreement and an organizational resolution for the new LLC.

Effect of Domestication on Foreign (Out-of-State) LLC Registration Requirements

When the LLC domesticates/converts to a new state, it no longer exists in the previous state. Because it no longer exists in the old state:

• It is not considered a foreign entity in the new state, so there is no need to consider foreign registration requirements.
• It does not need to be dissolved in the old state, because it no longer exists there by virtue of the domestication.

Foreign registration may be a concern if the LLC will continue to transact business in the old state. In that scenario, the LLC may need to register as an out-of-state (foreign) LLC in the old state after it converts to the new state.

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 employer identification number 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 unpaid franchise tax obligations of the old business.

1. Fourteen U.S. states—California, Colorado, Delaware, Florida, Georgia, Louisiana, Maine, Michigan, Nevada, North Carolina, Ohio, Oregon, Texas, and Washington—use the term conversion to refer to the legal process to move an LLC to another state. The other states that permit domestication—Alaska, Arizona, Connecticut, District of Columbia, Idaho, Illinois, Indiana, Iowa, Kansas, Massachusetts, Minnesota, Mississippi, Nebraska, New Hampshire, New Jersey, North Dakota, Pennsylvania, South Dakota, Utah, Vermont, Virginia, Wisconsin, and Wyoming—use the term domestication to refer to the same procedure.