One of the great things about being an entrepreneur is the ability to set up shop wherever you want. While some businesses are easier to move than others, the explosion of the internet and the advent of the “location independent” business has made it easier than ever to conduct business anywhere in the world.
But moving your business from one state to another state comes with some decisions that could significantly impact taxes. If you are a sole proprietor, the only thing you have to do is register in your new state, if necessary. If you are any other form of entity, you essentially have three options for your move:
1. Continue operating in your old state and register as a foreign entity in your new state.
This option will likely be the most expensive, since you will have to pay any yearly fees for both states. But if you have a good reason for wanting to remain in business in your old state, this is the way to go.
2. Dissolve the entity in the old state and form a new entity in your new state.
This option will result in the largest possible tax consequences. Since you are essentially shutting down the business, you are opening several potential taxable events. This option may sound best for those wanting a clean slate, but in my opinion it is the worst idea.
3. Form a new entity in the new state and merge the old entity into it.
And here is the option I recommend for 95 percent of businesses switching states. By following this option, you can erase the fees associated with operating in two states while avoiding the IRS consequences of option two.
Merging From One State to Another
Since option three is what I recommend for almost every business switching states, it is the only one we will go into detail on. There are two basic steps for accomplishing the move.
First, you want to close your business in your old state. This process will vary from state to state, but in most cases it involves filing out a form and submitting it to the proper department. Also, depending on the state and the type of business entity, you may be required to file a final tax return when closing the business in that state. The best way to figure out all the steps required to close a business in your old state is to call their department of taxation.
Second, you will have to open and merge the business into your new state. This process is much simpler than it sounds. In most states, you can register your business online and simply click on an option that you are merging an existing company from another state. If the state you move to does not have an online option, you will have to mail in a copy of the forms, but the rest of the process is essentially the same. Again, you will want to make sure you are doing everything correctly and it’s probably best to call the proper department in your new state.
Learn the New Rules
Different states have different rules for different business entities. When moving states it is important to learn and follow the rules of your new state. Some states have very few rules and fees associated with doing business in their state, others have lots of rules and high fees (I’m looking at you, California!).
In order to make sure your business stays up and running, talk to someone in your new state who can educate you on the rules and fees involved in doing business.
Don’t Forget to Tell the IRS
By choosing to merge your company into your new state, you avoid any IRS tax consequences. But it is still important to let them know your business has moved. They will need to know your correct address in order to send you important info when necessary.
Also, don’t forget that all fee’s and expenses involved in moving your business from one state to another is a direct write-off in your business!
If you do things right, merging your business from one state to another can be a very easy process. But it’s not something you want to do wrong and it is always a good idea to contact a CPA for assistance!