Business & LLC Domestication Explained

In this episode of Coffee with Carl, attorney Carl Zoellner explains the domestication of a business entity and how this differs from foreign filing a business entity.

In one of my previous videos, I explained what it means to foreign file a business entity to do business in another state. Today, let’s go over domesticating a business entity and how this is different from foreign filing.

Foreign Filing vs. Domesticating a Business Entity

In a nutshell, foreign filing a business entity means telling a state other than where your business was formed that you’re doing business in that state. When you foreign file a business entity, you still retain the original situs (site or location) of your business entity, whether that’s an LLC or corporation.

Domestication is a little different. When you domesticate a business entity, you abandon the previous situs and establish a new one in a state that allows it.

One significant difference to note is the availability of these options. Every state in the US allows foreign filing of a business entity. However, only some states allow for domestication. At my last count, there were about 27 states that allow you to actually transfer your business entity there from another state versus just foreign filing it.

When Is Domestication Advantageous?

The question then becomes, “When would it be advantageous to domesticate an entity versus just foreign filing it?”

To answer this, one of the first things I would consider is the cost of each option. At the end of the day, if you’re foreign filing an entity, you’re basically paying to maintain that entity in two states. If you’re domesticating an entity, then you’re abandoning your prior filing in the previous state and are moving to a new state. Thus, you would only have the cost of maintaining the entity in one state (the new state).

Domesticating could be advantageous over foreign filing in a few different scenarios. For instance, if you have properties in one state, then do a 1031 exchange for properties in another state. Or, if you move your corporation from its current state to a no-income-tax-state, you may want to domesticate the corporation in the new state.

Additionally, depending on how long your entity has operated, it may make more sense to domesticate it in some situations.

It’s important to do your research when it comes to this strategy. Currently, domestication is only available in about half of the US states. For states that do not allow domestication of a business entity, you would basically have to set up a new entity in the new state or consider foreign filing.

The Takeaway

When it comes to changing the state of a business entity, there are two main tools at your disposal: foreign filing and domestication. Foreign filing a business entity in a new state will result in paying to maintain that entity in two states. The upside of foreign filing is that it’s allowed in all fifty US states. Domesticating a business entity in a new state abandons the entity’s previous states and sets it up in a new state, but this is only an option in about half of the US states.

If you’re considering moving your business entity, I would highly encourage you to claim a complimentary Strategy Session with one of our Senior Advisors today. On the call, we’ll discuss your current and future business and investing activities and goals to then build you the best custom entity structure to lower your taxes and protect your assets. You can schedule online or by calling 888.871.8535.

 

Watch as Carl breaks down what it means to domesticate a business entity in a new state.

 

Resources mentioned in this video:

 

Got an idea for a future Coffee with Carl? Send it to Carl at cwc@andersonadvisors.com.

 

BONUS VIDEO

https://youtu.be/arGaE_9HlHM