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 limited liability company (LLC) with them. This article explains how to convert an out-of-state LLC to a Texas LLC.
An LLC formed in another state is governed by the laws of that state, including that state’s filing requirements and tax system. 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. For example, a California resident that relocates to Texas may want to convert their former California LLC to a Texas LLC avoid having to deal with California’s more onerous requirements.
The Texas Business Organizations Code calls an out-of-state LLC a foreign LLC and provides clear procedures for converting foreign LLCs to Texas. Domestication is the process of changing a foreign LLC to a Texas LLC. After domestication, the LLC is treated the same as any other Texas LLC and is no longer subject to the laws of the state where it was originally formed.
LLC Domestication vs. New LLC Formation
Before domesticating an out-of-state LLC, it is worth considering whether it may make more sense to simply 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 $70 filing fee to the California Secretary of State. Most LLCs will also 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.
Requirements for Texas LLC Domestication
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 State Law. 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. 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. (We can run a preliminary check to verify name availability before filing any documents.)
- Draft and Adopt the Plan of Conversion. Texas LLC domestication requires a plan of conversion. A plan of conversion is a written plan adopted by the LLC to formally authorize the domestication. Once it is authorized, plan of conversion must either be filed with the Secretary of State or summarized in the certificate of conversion (see below). The exact requirements of the plan of conversion depend on the situation, but each plan of conversion will include:
- The name of the out-of-state LLC being domesticated;
- The name of the Texas LLC;
- A statement that the out-of-state LLC is continuing its existence in the organizational form of the Texas LLC;
- A statement that the LLC will be a Texas LLC; and
- The manner and basis, including use of a formula, of converting the ownership or membership interests of the out-of-state LLC into ownership or membership interests of the Texas LLC.
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).
- 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.
In addition to these requirements, you must also meet the requirements of the law of the state where the LLC was originally formed. For example, to move a California LLC to Texas, you must comply with California’s domestication requirements in addition to the Texas-specific requirements described above.