- Posted on: May 19 2022
By: Dunlap Bennett & Ludwig [5/19/22]
After the close of the Covid-19 pandemic shutdowns, domestic migration to the State of Texas soared to new heights not seen in any other state of the Union. Specifically, since April 1, 2020, the State of Texas has seen its population rise by 1.3% compared to 0.13% nationally[i]. With this boom in domestic migration to Texas, many business owners that made the move may have had a business entity located in their previous state. If a business is maintained in its previous state of residence, the business owner will be liable for annual filings and tax payments in their previous state. Additionally, if the business activity also moved to Texas, then the business must register as a foreign entity to conduct business in Texas…but this will not relieve your company’s liability for filings and tax payments in the original state of formation. We routinely see clients that failed to keep with up filings in their home state and eventually lose the protection of their entity altogether.
However, there is a procedure available to convert your foreign company into a Texas entity, which is typically referred to as “domestication” or “conversion”. In Texas, this process is called conversion, but both terms will be used interchangeably throughout this article.
Conversion makes sense if you moved yourself and your business to Texas. Once converted to a Texas entity, business owners are allowed to forego requirements in their original state of formation. Domestication creates a new Texas entity, which is allowed to maintain the previous contracts and other liabilities of the original company, while only requiring annual filings to be made to the State of Texas. Conversion involves completing several filings within the State of Texas and the state where your entity was originally formed. We note several states do not allow for domestication, such as New York, Missouri, or Oregon, to name a few. Thus, before considering domestication, you must first determine if your home state will allow for domestication or conversion…if not, then you will either have to consider filing a new entity in Texas or register the business as a foreign entity doing business in Texas.
If you determine that your business is eligible to convert to a Texas entity, you will need to prepare and file the necessary documents in your original home state of formation and Texas. The State of Texas requires the following documentation to be filed with the Texas Secretary of State prior to officially domesticating the entity.
Plan of Conversion: The plan of conversion is a document that will be submitted with the Certificate of Conversion and spells out the required information to complete domestication. Specifically, you must include:
- The name of the entity as it exists in the original state of formation;
- The name of the company as it will exist in Texas;
- A statement that the converting entity is continuing existence in the form of the newly converted entity;
- A statement of the new entity type (corp. or LLC);
- A certificate of formation for the newly converted entity;
- A statement and formula showing the new membership or share percentage, if applicable;
- A statement that the converted entity will pay franchise tax as they come due, or a clearance letter from the Texas Comptroller acknowledging the existence of the converted entity; and
- Certificate of formation of the new entity.
Certificate of Conversion: The Certificate of Conversion should include the Plan of Conversion, or an acceptable statement to the same effect, and must state that the Plan of Conversion has been approved as required by the laws of the state in which the entity was originally formed. The following information is also required in your Certificate of Conversion:
- Name, entity form type, and jurisdiction of the original entity;
- Name, entity form type, and jurisdiction of formation of the Texas entity;
- A statement that the plan of conversion is a file at the principal place of business of the original entity, and the address of the principal place of business;
- A statement that a plan of conversion will be on file at the principal office for the Texas company, and the address for the Texas company; and
- A statement that a copy of the plan of conversion will be furnished upon written request, without cost by the original entity before conversion or by the Texas entity after conversion to any member of the original entity or Texas entity.
Certificate of Formation: All new entities formed within the State of Texas must file a Certificate of Formation as part of the Texas entity formation process. The Certificate of Formation must be obtained and included within your Plan of Conversion. The Certificate of Formation must also include a statement that the new entity is being formed as part of domestication and under a Plan of Conversion.
Once you have completed the necessary steps for conversion within the State of Texas, you must next complete the necessary paperwork and filings for the original state of formation. Most states require authorization of the conversion through internal company documentation, such as a meeting authorizing conversion. Additionally, you will likely need to file a specific Certificate of Conversion, or similar form, through the original state of formation in order to finalize the conversion process.
In closing, while most people moving to Texas do not have to consider this issue, if you are a business owner, you may need to take advantage of this process. So, if you recently moved your business to a new state, you should review your company’s formation documents to ensure you are continuing to comply with all business filing and reporting requirements within your original state of formation. If you have moved to Texas but did not move your business, you should contact one of our attorneys to discuss your options for converting your company to a Texas entity. As mentioned above, this could cut down on yearly filings and fees, and allow you to take advantage of the favorable business climate in Texas.
Posted in: Business Law