June 23, 2021
Whether you’re concerned about changing tax laws or preparing for retirement, business owners often transfer their companies to different states. However, permanently moving your headquarters over state lines differs from opening out-of-state stores or expanding your e-commerce business. Complete transfer requires lawfully closing your business in your current state and essentially reopening your business in the new state. Companies failing to do so properly often face unexpected default judgments and financial liability.
At McClanahan Powers, PLLC, our dedicated business transfer attorneys can help you do it right the first time. Connect with our Virginia and D.C. corporate lawyers today by calling (703) 520-1326 or contacting us online.
Many states allow registered foreign corporations to conduct business in their jurisdiction under the procedural rules of their home states. For example, Virginia companies may generally deliver products to D.C. without filing D.C. articles of incorporation. The Virginia Stock Corporations Act (“VSCA”) would also govern internal corporate affairs. However, transferring your domestic operations to another state changes the corporate laws governing your company.
Switching jurisdictions means adhering to local corporate laws and may require altering the entity itself. For example, Virginia recognizes professional corporations, but West Virginia does not. Moving your business over this state line means finding the most compliant domestic entity. Businesses owners should consider the following laws, which often differ in each state:
Most states also have specialized legislation applicable to internal business operations. Virginia has the VSCA, the Limited Liability Company Act, and Professional Corporations Act, for example. Transferring jurisdictions means conducting a thorough review of your governing documents, business structure, and internal operations to ensure legal compliance. An attorney at McClanahan Powers, PLLC can perform an entity transfer analysis by comparing state corporate laws and recommending necessary operational changes and policy amendments.
One of the biggest mistakes transferring owners make is failing to close shop in their former states. This includes more than simply inactivating your business. It means changing your entity designation from a domestic corporation to an inactive, foreign corporation per entity bylaws. Permanently moving your business over state lines often means going through internal corporate dissolution proceedings, holding necessary partnership meetings, and filing articles of dissolution. Failing to abide by these formalities may result in invalid dissolution and transfer.
Transferring businesses also means updating registered agent information to ensure receipt of legal notices. Claimants might still sue business entities in their former states for conduct occurring within that state. For example, a former supply contractor may file contract litigation in Virginia state court and even effectively serve the Clerk of the State Corporation Commission. Entities that don’t update their registered agent information may never receive notice of pending litigation, which often results in default judgments and non-payment penalties. Negligently failing to dissolve the business entity and update your registered agent are not grounds for vacating default. You must generally pay default judgments, and outstanding liability could impact your property and business operations across state lines.
Lastly, you must pay all outstanding taxes, judgments, and fees before shutting down the business and inform the IRS of a permanent transfer. The former state’s corporate commission may prevent you from legally transferring the business until you meet these obligations. Maintaining the same domestic business in two states, even unintentionally, creates legal conflicts between operative laws. A corporate attorney at McClanahan Powers, PLLC can help former Virginia and D.C. business owners file the simple closing paperwork necessary to dissolve their current entities and prevent default judgments.
This process is similar to starting a new business. It involves filing state-mandated governing documents, finding a local registered agent, establishing a domestic business address, and paying start-up fees. In most cases, an experienced attorney can bring your previous corporate policies and documents into compliance with new state laws. Business owners should find local corporate counsel to assist them with the start-up process and ensure transfer compliance. Moving entities should also consider the following:
Businesses transferring to Delaware, California, Illinois, or New York should immediately contact legal counsel for transfer assistance. These states have complex regulatory, labor, privacy, and consumer protection laws often requiring additional compliance analysis. If you’re also moving employees to a new state, consider drafting transfer contracts addressing moving fees and reliance guarantees. Businesses could bear liability if employees move to the new state in reliance on employment promises, and you experience start-up delays.
Permanently moving corporations across state lines essentially requires shutting down current operations and starting new entities. However, you might speak with an attorney about alternatives. Most states allow companies to lawfully operate as foreign business entities without mandating complete dissolution and reformation. An experienced D.C. and Virginia corporate transfer attorney at McClanahan Powers, PLLC, can discuss which plan is right for your business. Schedule your complete entity transfer analysis with us today by calling (703) 520-1326 or contacting us online.