LLCs are governed by the law of the state in which they are formed. An LLC formed in Texas is governed by Texas LLC law, an LLC formed in Florida is governed by Florida LLC law, and so on.
LLC members may change the law that governs an LLC through a process called domestication. LLC domestication allows an LLC formed in one state to elect to be treated as though it was formed in a different state. After the LLC domestication is complete, the LLC is no longer governed by the law of the state where it was formed, but by the law of the state to which it has been domesticated.
Texas has one of the highest population growth rates in the nation. Many business owners that move to Texas want to bring their out-of-state LLC with them. Moving an out-of-state LLC to Texas has several benefits, including avoiding having to file documents in multiple states and taking advantage of Texas’s favorable business laws and business tax structure.
This article explains how to convert an out-of-state LLC to a Texas LLC.
Terminology: Texas LLC Conversion vs. LLC Domestication
May state LLC acts use the term domestication to refer to moving an LLC from one state to another without changing its form. An LLC that domesticates from another state to Texas is still an LLC. The only difference is that the law of a new state—Texas—now governs the LLC.
Texas law uses the term conversion to refer to an LLC domestication. The rationale is that the LLC is converting from one type of entity (an out-of-state, or foreign, entity) to a different type of entity (an in-state, or domestic, entity). This approach is not concerned with whether the LLC remains an LLC. Instead, it treats the move to a new state as a conversion to a new entity type.
This article uses the terms conversion and domestication interchangeably.
Attorney Practice Note: This article deals with moving an LLC from another state to Texas. A similar procedure applies for converting an LLC to a corporation. If an existing LLC is seeking investment from institutional investors, the investors sometimes require the LLC to convert to a C corporation as a condition of funding. Thankfully, as more investors get familiar with the LLC structure, this is becoming less of an issue.
Legal Effect of Texas LLC Domestication
Texas law permits LLC domestication.1 The primary benefit of Texas LLC domestication is the ability to change the governing law that applies to the LLC without disrupting LLC operations. A Texas LLC domestication has the following legal effects:
- Continued Existence. The original LLC continues to exist as the Texas LLC without interruption in the organizational form of the LLC.
- Automatic Property Conversion. Any property owned by the original LLC continues to be owned by the new LLC in the new form of the LLC. There is no need for any subsequent acts or deeds—the property transfer is automatic and uninterrupted.
- Continued Liabilities. All liabilities and obligations of the original see become liabilities and obligations of the Texas LLC without being affected by the conversion.
- Unimpaired Creditor Rights. The right of creditors against the original LLC members continue to exist and may be enforced as if the domestication had not occurred.
- Legal Proceedings. A proceeding pending by or against the original LLC or by or against any of the original LLC’s owners or members in their capacities as owners or members may be continued by or against the Texas LLC in the new organizational form and by or against the previous owners or members without a need for substituting a party.
- Conversion of Equity. The ownership or membership interests of the original LLC that are to be converted into ownership or membership interests of the Texas LLC as provided in the plan of conversion are converted as provided by the plan.
- Limited Liability. If, after the conversion takes effect, an owner or member of the Texas LLC as an owner or member is liable for the liabilities or obligations of the Texas LLC, the owner or member is liable for the liabilities and obligations of the original LLC that existed before the conversion took effect only to the extent that the owner or member:
- agrees in writing to be liable for the liabilities or obligations;
- was liable, before the conversion took effect, for the liabilities or obligations; or
- by becoming an owner or member of the Texas LLC, becomes liable under other applicable law for the existing liabilities and obligations of the Texas LLC.2
These effects preserve the existence of the original LLC in the form of the Texas LLC without otherwise altering the basic assets, liabilities, and rights of the parties.
LLC Domestication vs. New LLC Formation
Domestication is not the only way to continue a business that was started in another state. Another option is to form a new Texas LLC and dissolve the out-of-state LLC.
Creating a new LLC may be beneficial if there are potential outstanding debts against the out-of-state LLC. Formally dissolving the out-of-state LLC and forming a new Texas LLC can provide a fresh start. But dissolving the old LLC may not always be feasible. If the LLC has assets or continuous income, dissolving the old LLC and re-contributing assets to a new LLC may cause tax problems.
How Much Does a Texas LLC Domestication Cost?
Cost is another consideration. Texas LLC domestication requires a few layers of filing fees. These filing fees include the certificate of conversion ($300) and the certificate of formation (also $300), both of which are required to complete the domestication. These fees are in addition to (a) the legal fees required to draft the documents necessary to complete the conversion; and (b) any filing fees that must be paid to the state where the LLC was originally formed.
Example: To convert a California LLC to a Texas LLC, you must pay a $30 filing fee to the California Secretary of State. Some LLCs may be required to pay an annual minimum tax of $800.00 to the Franchise Tax Board. The fees and taxes are in addition to the fees paid to the Texas Secretary of State.
To fully evaluate these costs, though, remember that operating an out-of-state LLC in Texas also requires additional filing fees. The filing fees for an out-of-state LLC to register to do business in Texas are $750 ($50 more than the aggregate filing fees for converting the LLC to a Texas LLC). In most cases, moving the LLC to Texas will make more legal and financial sense than registering the business in Texas and complying with the laws of both states.
Texas LLC Domestication Overview
Texas LLC domestication requires consideration of the two sets of laws: the law of the state where the LLC was originally formed and Texas law. The requirements of Texas law for domesticating an out-of-state LLC to Texas are outlined in the Texas Business Organizations Code and guidance published by the Secretary of State. These requirements include:
- Be Sure Domestication is Permitted by the Law of Both States. The first inquiry in Texas LLC domestication is whether the domestication is permitted by the laws of both states. Texas law clearly permits LLC domestication, but not all jurisdictions do the same. For the LLC domestication to be effective, the law of the state where the LLC was originally formed must permit domestication.3 To complete the domestication, additional filings are also required in the state where the LLC was originally formed.
- Be Sure Domestication is Permitted by the LLC Documents. Before domesticating the LLC, the LLC certificate of formation and operating agreement should be consulted to be sure that there are no restrictions that would prohibit domestication. If so, the LLC documents may need to be amended to permit the domestication.
- Be Sure the Name is Not Taken. If the out-of-state LLC has a name that is the same as, deceptively similar to, or similar to the name of an existing Texas entity, then the name may need to be changed to complete the conversion. Our article on Texas LLC formation discusses how to confirm name availability with the Texas Secretary of State.
- Draft and Adopt the Plan of Conversion. Texas LLC domestication requires a plan of conversion, discussed below. The plan of conversion must also be formally adopted by the LLC, either by resolution or by minutes of a meeting of the members and/or managers of the LLC.
- Prepare and File Certificate of Conversion. A certificate of conversion is a document that is filed with the Secretary of State to make the LLC domestication a matter of public record. The certificate of conversion must either include the plan of conversion as an attachment or include specific information summarizing the plan and agreeing that the plan will be kept on file and furnished without cost to members that request it. The certificate of conversion must be signed on behalf of the out-of-state LLC and include a statement that it has been approved as required by the law of the state of formation and the LLC’s governing documents.
- Prepare and File Certificate of Formation. The certificate of formation is a document that all Texas LLC founders must file to form the LLC. Even though an out-of-state LLC already exists under the laws of the state where it was formed, a Texas certificate of formation must be filed as part of the LLC domestication. The certificate of formation must include a statement that the LLC is being formed under a plan of conversion and give the basic identifying information about the out-of-state LLC being domesticated. This statement must be custom-drafted and added to the state forms. The certificate of formation must also be included in the plan of conversion or attached to the certificate of conversion.
- Franchise Tax Clearance. The conversion documents must include evidence that all required franchise taxes have been paid or that the Texas LLC is responsible for paying franchise taxes. This requires either (a) a certificate from the Texas Comptroller of Public Accounts stating that the converting entity is in good standing or (b) a statement in the certificate of conversion that the Texas LLC is responsible for paying franchise taxes.
- Withdrawal of Registration to Do Business (if Applicable). If the out-of-state LLC has registered to do business in Texas before the domestication, the registration is automatically withdrawn. The certificate of conversion must include the filing number for the registration so that it can be terminated.
- Pay Filing Fees. Documents submitted to the Texas Secretary of State must include filing fees (around $300 each for the certificate of conversion and certificate of formation, for a total of $600).
- Amend the Operating Agreement. An LLC’s operating agreement contains the details about the LLC’s operations, including its tax classification, how profits are divided, and how the LLC is managed. Texas LLC operating agreements—called company agreements—are specific to Texas law. Once the papers have been filed with the state, the LLC operating agreement must be amended to comply with the provisions of Texas law.
All documents required to be filed with the Texas Secretary of State are usually submitted in duplicate (two copies) to the Texas Secretary of State’s office in Austin. Electronic submission may be available for a small additional charge. The Secretary of State will file the documents and return stamped copies to you for your records.
Texas Domestication Documents
The Texas domestication process involves filing a series of documents with state agencies and communicating with the state agencies throughout the approval process. The Texas domestication paperwork involves three key documents:
- Plan of Conversion. A plan of conversion is a written document that approves the domestication. Texas law requires a plan of conversion, as does the law of most other states. If properly drafted, a single plan of conversion can usually satisfy the requirements of both states.
- Texas Certificate of Conversion. The certificate of conversion is a document that is filed after the plan of conversion to make the conversion effective in the records of the state.
- Texas Certificate of Formation. The certificate of formation is a document that is filed to create a record of the existence of the new Texas LLC that is continuing the existence of the previous LLC.
Each of these documents are discussed in more detail below.
Plan of Conversion
Texas LLC law provides that an out-of-state LLC—called a non-code organization—may domesticate to Texas by adopting a plan of conversion.4 Texas law requires the following provisions:
- The name of the LLC as it exists in the law of the state where it was originally formed;
- The name of the LLC as it will exist under Texas law;
- A statement that the original LLC will continue its existence as the new LLC;
- A statement that the LLC will continue to be an LLC and the jurisdiction in which it was formed;
- If the LLC will continue to exist under the law of the state where it was originally formed, a statement that the LLC will continue to exist under the law of the original state after the domestication is complete;
- If the LLC will not continue to exist under the law of the state where it was originally formed, a description of the manner and basis, including use of a formula, of converting the members’ equity in the original LLC to equity in the domesticated LLC; and
- The certificate of formation of the new LLC.5
A plan of conversion may also include any other provisions relating to the domestication, as long as they are not inconsistent with Texas law.6 This permissive inclusion is useful in that it allows a single plan of conversion to be used to comply with the law of both states. If the law of the original state requires a provision in the plan of conversion that Texas law does not also require, the plan of conversion can include the provision without invalidating it under Texas law.
The Texas plan of conversion is, by its nature, an internal document that evidences the decision of the members to proceed with the conversion. Texas law does not strictly require the plan of conversion to be filed with the state, but omitting it from the filing requires additional information to be included in the certificate of conversion. In most cases, it is best to simply attach the plan of conversion to the conversion paperwork.
Certificate of Conversion
The Texas certificate of conversion must either include the plan of conversion or a statement certifying:
- The name, organizational form, and jurisdiction of formation of the original LLC;
- The name, organizational form, and jurisdiction of formation of the Texas LLC;
- A statement that a plan of conversion is on file at the principal place of business of the original LLC and the address of the principal place of business;
- that a plan of conversion will be on file after the conversion at the principal place of business of the Texas LLC and the address of the principal place of business; and
- that a copy of the plan of conversion will be on written request furnished without cost by the original LLC before the conversion or by the Texas LLC after the conversion to any owner or member of the original LLC or the Texas LLC.7
The certificate of conversion must also state that the plan of conversion has been approved as required by the laws of the formation state and the governing documents of the original LLC.8 If the LLC will continue to exist under the law of the original state, it must be titled “Certificate of Conversion and Continuance” and include a statement certifying that the original LLC is electing to continue its existence in its current organizational form and jurisdiction of formation.9
Certificate of Formation for New Texas LLC
All Texas LLCs are required to file a formation document—called a certificate of formation—as part of the Texas LLC formation process. This requirement also applies to domesticated LLCs, which must file a certificate of formation along with the certificate of conversion.10
When the LLC is being formed as part of a domestication, special language must be included in the certificate of formation to indicate that the Texas LLC is formed under a plan of conversion. This information is usually included in the Supplemental Provisions / Information section of Form 205, Certificate of Formation.
The Texas LLC Certificate of Formation is discussed in more detail in our article on Texas LLC formation.
Original State Domestication Documents: Articles of Domestication / Certificate of Conversion
In addition to the Texas requirements, the LLC domestication process must meet the requirements of the law of the state in which the LLC was originally formed. For example, to move an LLC from California to Texas, the domestication paperwork must comply with California’s domestication requirements in addition to the Texas-specific requirements described above.
While the requirements can vary from state to state, most states have requirements that are similar to Texas requirements. The domestication generally begins with the plan of conversion—which may go by different names—and conclude with the filing of a document with the original state to consummate the conversion. The document files with the state may be called a certificate of conversion or articles of domestication, depending on the law of the original state.
- Tex. Bus. Orgs. Code Ann. § 10.101.
- Bus. Orgs. Code Ann. § 10.106.
- Bus. Orgs. Code Ann. § 10.102(c).
- Tex. Bus. Orgs. Code Ann. § 10.102(a).
- Bus. Orgs. Code Ann. § 10.103(a).
- Tex. Bus. Orgs. Code Ann. § 10.104.
- Bus. Orgs. Code Ann. § 10.154(b)(1).
- Tex. Bus. Orgs. Code Ann. § 10.154(b)(2).
- Tex. Bus. Orgs. Code Ann. § 10.154(c).
- Tex. Bus. Orgs. Code Ann. § 10.155.