In California, the taxes and regulations can be difficult to keep up with and there are many reasons why business owners would want to move their corporations out of state. There are a few different ways to move your corporation out of California, each with its own pros and cons.

The best way to relocate a California corporation out of state was not possible until recently. California Senate Bill 49 was put into effect January 1, 2023, which permits corporate conversion. Some other jurisdictions call it domestication. California corporate conversion allows for the “conversion of a corporation into a domestic other business entity, foreign other business entity, or foreign corporation.” The catch is that this option is not always available; currently, only around 36 states have conversion/domestication statutorily authorized, meaning there are a handful of states that a California corporation cannot convert to. That being said, this method is generally the cheapest and most efficient if available.

The second-best way to move a corporation is a merger. Here, a merger is when the business owner forms a corporation in the new state and then merges their current corporation into the newly created one. California offers corporations a tax-free statutory merger, so while it will still be more expensive than conversion, it is still the second-best option because of tax incentives. Aside from a steeper cost, mergers are also generally more difficult and time-consuming to complete because it deals with two entities instead of one.

Third, the least recommended option of the three is reincorporation. Reincorporation is similar to a merger, where a new corporation is formed in the desired state. But instead of merging, the assets and liabilities are transferred to the new corporation, where then the old corporation is dissolved. The transfer or sale of assets to the new corporation can result in very high tax rates, making this process more expensive and just as complex as merging.

Conversion, merging and reincorporation all require numerous forms to be filled out, and sometimes documents to be drafted. For example, a California conversion where a corporation intends to move into another state requires a plan of conversion, a statement of conversion and must take into account components such as: foreign corporation registration, annual reports and registrations, and other factors that go into coordinating a relocation. The state that the corporation is transferring to would also require some forms and documents too, depending on the state. While some methods are more economical and simpler, all methods require filing, and that costs money, so it’s critical to make sure it’s done right the first time. If you have any issues or concerns with converting or merging your California corporation, please contact our office.