How To Change The State Of Incorporation

Let’s say you are an entrepreneur who lives in Arizona, so you decide to incorporate your web-based business in Arizona. A few years later, your wife’s company transfers her to New York. To operate your company in New York as a foreign (i.e., out-of-state) corporation, you would qualify to do business in that state. When that happens, your company becomes obligated to pay franchise taxes and file tax returns in both Arizona and New York. Ouch!

Although widely assumed to be an easy process of simply reincorporating in a new state under Internal Revenue Code Section 368(a)(1)(F), until very recently, the traditional solutions were to either dissolve the existing corporation and form a new corporation; or form a new corporation and merge the Arizona corporation into the new corporation. Even worse, forming a new corporation, required the entrepreneur to have a new Tax ID number and new bank accounts, among other inconveniences.

On August 1, 2009, Delaware came to the rescue by broadly enabling existing entities to convert to Delaware entities (without a cumbersome merger). The new law even permits the conversion of one entity type to another entity type (e.g., the conversion of an Arizona LLC to a Delaware corporation). See Section 265 and 266 of the Delaware General Corporation Law.

The process is simple – to convert the Arizona corporation into a Delaware corporation, a Certificate of Conversion along with a Certificate of Incorporation is filed. Then, the Delaware corporation is qualified to do business in New York.

Only Delaware makes it easy for a small business owner to pick up and move the corporation to a new state without the hassle of coversion or merger. Let’s say you wanted to move the corporation to Florida. To do so, you would simply surrender the right to transact business in New York and qualify to do business in Florida. Although Delaware is touted as a haven known for its low annual fees and well founded corporate law, the real benefit of Delaware to a small business owner is mobility.

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