During one of my webinars earlier this year, a participant wanted to know if it's possible to dissolve an entity in one state but continue to operate in other states where the company has a certificate of authority (foreign qualification) to conduct business.
As a financial professional, you might encounter the same sort of question from your clients. Full disclosure: It can get complicated, and the answer depends on the situation. Below, I'll step you through some hypothetical examples. But first, I'd be remiss not to mention that any time a client wishes to form, dissolve, foreign qualify or make other changes to their business entity, it's critical they get professional legal and financial advice.
Now, let's dig in!
Can a business be dissolved in its home state but continue to operate out of state?
Before I describe how things generally work, it's important to establish what "home state" means.
The state where a business entity (e.g., limited liability company or corporation) has registered its formation documents is its home (domicile) state. If it wants to conduct business (or if it has
Domestication
Some states (such as California, Nevada and Utah) allow for "domestication," enabling LLCs and corporations to change their formation with less paperwork and formalities than forming an entirely new entity. After completing the process (which includes completing Articles of Domestication or a similar document), the entity is registered as a domestic LLC or corporation in the state where it was formerly foreign-qualified.
For example, suppose an LLC is registered as a domestic limited liability company in California and has foreign qualification to operate as a foreign LLC in Nevada and Utah. Now, the LLC members have decided to close operations in California but want to continue conducting business in the other two states. They opt to domesticate their LLC to Nevada. By following the domestication procedures to close the California LLC and re-home it to Nevada, they may then amend their foreign qualification information in Utah to continue operating as a foreign LLC there.
Dissolve and start anew
Other states (such as Alabama, Delaware and North Carolina) don't support domestication. So typically, an LLC or corporation must be dissolved in its home state and start from square one in another if its owners wish to re-home their business (even if they're foreign-qualified in the state where they want to domesticate). That means filing Articles of Dissolution in the home state and withdrawing their foreign qualification in the other states where they conduct business. Then, they must go through the business formation process to form a new LLC or corporation in their chosen state. After the new entity is formed, they can then apply for foreign qualification in the other states where they wish to operate.
For example, if an Alabama corporation wants to cease operations in that state, set up its principal office in Delaware and continue to operate as a foreign corporation in North Carolina, it would need to be dissolved in Alabama and withdraw from foreign qualification in Delaware and North Carolina. Then, its organizers would need to form a new corporation in Delaware and file to have that new corporation foreign qualified in North Carolina.
Can a business close as a foreign entity but continue to operate in its home state?
Yes!
And it's far less complicated because the business entity remains intact in its home state despite closing its operations in the states where it is foreign-qualified. The LLC or corporation's owners would simply follow the specific state's procedures to withdraw their certificate of authority and wrap up their affairs to close their foreign entity.
Other considerations
In addition to completing the proper forms related to dissolutions, business formations, domestications and foreign qualifications, business owners have other responsibilities when closing or starting a business in or out of state.
- Updating the LLC operating agreement or corporate bylaws;
- Designating or canceling
registered agent services; - Setting up or closing tax accounts;
- Obtaining or canceling business licenses and permits;
- Filing or updating their
BOI report ; - Obtaining, updating or canceling insurance policies; and,
- Updating other public and informing stakeholders (banks, customers, vendors, etc.).
Last but not least, your clients should understand that starting, closing, moving and foreign qualifying a business entity have both legal and tax implications. It's wise for them to consult with their attorney and tax advisor (a.k.a. YOU if you have the required licensing and expertise to advise them in that capacity) for guidance.
