By Sutter Law a San Francisco Transactional Business Law Firm
Table of Contents
- Reincorporating in Another State
- Basic Dissolution and Reincorporation
- F-Reorganization
- Act as a Foreign Corporation
Reincorporating in Another State
Your San Francisco Startup has just made the weighty decision to reincorporate itself in another state (say, Delaware).
What legal steps do you need to take to effectuate this change? There are a few ways you can reincorporate in another state.
No matter what method you use, however, the decision to reincorporate first requires approval by resolution from the Company shareholders and board of directors.
Once you have the green light internally, there are a few options…
Basic Dissolution and Reincorporation
You can simply dissolve your San Francisco Start-Up with the California Secretary of State, then incorporate it anew in your new state of choosing.
Though this process will vary by state, you’ll need to file an Article or Certificate of Dissolution, and likely an election to wind up and dissolve, with the Secretary of State.
This may require that the state Attorney General review the Company’s finances for the last few years to confirm that all assets and liabilities have been adequately dispersed or that the Company has no assets or liabilities at the time of dissolution.
You’ll also need to wrap things up with the Franchise Tax Board of the state.
The problem with this method is that there are potentially substantial tax implications associated with dissolving your existing Company.
Since it requires that you liquidate Company assets and realize gains, shareholders may have to deal with capital gains reporting requirements, and the Company may have to report income.
If your Company is just starting out, this may not be a problem. Regardless, this problem would be avoided by the second method of reincorporation…
F-Reorganization
The basic premise of the Reorganization method is that your San Francisco Start-Up would form a new company in the new state, and then merge with that company.
This merger method is known to the IRS as an F-Reorganization, and, if you satisfy all requirements for such categorization, you effectively avoid the tax problems of the first method.
The Company never technically changes in the eyes of the federal government (though it will dissolve in your old state after the merger), so there is no liquidation event to trigger the tax consequences described above.
Investors maintain their continuity of interest.
As with basic dissolution and reincorporation, Reorganization requires that you go through the steps of incorporation required by the new state.
Once the new state corporation has been formed, both corporations will need to get approval from their boards of directors and their shareholders to consummate the merger.
Both corporations will need to exercise prudence and engage in the formal merger protocol of due diligence, negotiation of terms, and exchange of representations and warranties.
The old-state shareholders will need to be sensitive to the receipt of “boot” (tax jargon for a cash receipt component in the merger), which can be taxable (there are limitations on the amount of boot that can go untaxed in a reorganization).
For your old-state incorporation, you’ll still have to go through the dissolution filings and procedures mentioned in method 1, but you won’t need to generate a new EIN.
Act as a Foreign Corporation
Lastly, your San Francisco Start-Up can continue to exist in its original state.
Then, to operate in your new state, you simply file as a Foreign Corporation with the Secretary of State of the new state.
This is a very common practice for San Francisco-based companies that are incorporated in Delaware.
The problem with this method is that you will now subject yourself to annual fees for both states, which can get pricey (as we see in California).
Each Secretary of State will have its own vagaries with regard to dissolution and incorporation.
If you are considering reincorporating your San Francisco Startup Company in another state, Sutter Law can help.
If you need an LLC attorney in another state check out this resource: https://howtostartanllc.com/business-lawyers
