In a recent webinar I presented, a participant asked if a corporation's status is affected when shareholders move to a different state. When a corporation's shareholder relocates, will it impact the business? (And if so, in what ways?)
In short, it depends on the circumstances. Here are some scenarios to consider:
1. Business operations are moving to the new state
Generally, a shareholder's move to a new state won't affect the corporation unless its operations are relocating with the shareholder. If the company will relocate its operations (i.e., discontinue doing business in the old state and only operate in the new state), its owners must
Doing so involves various tasks, including filing Articles of Incorporation in the new state and Articles of Dissolution in the existing state.
2. The corporation is expanding its operations into the new state
If a shareholder moves to a new state and the corporation expands its operations to conduct business in that state (while remaining domiciled in the original state), the corporation must foreign qualify in the new state. Foreign qualification allows the corporation to legally conduct business in the state. To foreign qualify, the corporation must file the appropriate state paperwork (e.g., Application for Authority or Statement and Designation by Foreign Corporation) to establish the company as a foreign entity. Typically, the foreign qualification application must be accompanied by a Certificate of Good Standing issued by the corporation's home state.
3. The shareholder works for the corporation
If the shareholder is on the corporation's payroll, the company must register for payroll tax in the new state where the shareholder is moving — even if business operations stay exclusively in the corporation's home state. Along with state payroll tax registration, the corporation may have to file for foreign qualification in the new state because it has an employee there. However, each state has different requirements.
Effects on taxes
Along with the possible requirement to file paperwork for establishing the corporation in the new state, there may be
A corporation is subject to state tax in the state where it's registered as a domestic entity and in any state(s) where it's registered as a foreign entity.
For instance, if the shareholder is an employee of the corporation, the business must withhold and remit state income tax and other employment-related taxes to the shareholder's new state of residence. Likewise, the shareholder is responsible for paying taxes and filing tax returns in their new home state.
Every state has its own tax laws and regulations, so if a corporation moves or expands to a different state — or if its employees relocate to another state — it may be responsible for taxes (e.g., as corporate income tax, state franchise tax, state sales tax, etc.) it previously wasn't subject to in its original state. Moreover, tax rates vary from state to state.
Effects on ongoing business compliance
States' ongoing compliance responsibilities also differ. While nearly all states require corporations to submit annual reports, their deadlines vary. Also, business license application and renewal requirements aren't uniform from one state to the next.
One thing they have in common is that corporations (whether domiciled or foreign-qualified) must designate and maintain a
A corporation's officers must ensure they understand and comply with all applicable compliance obligations in the company's home state and any in which it's foreign-qualified. Failure to follow through with any requirements could result in fines and penalties. Moreover, it could ultimately jeopardize the corporation's status of good standing with the states involved, putting the entity at risk of involuntary dissolution and its shareholders at risk of losing the personal liability protection afforded by incorporating a company.
The bottom line
Encourage your clients who own corporations to get insight from an attorney and you (or another qualified tax professional if you're not licensed to advise them) about what to expect if an employee-shareholder will be moving their residence to another state. The specific circumstances, the state involved and other factors bring nuances to the situation, making it critical for business owners to seek expert guidance as they prepare for the changes ahead.
