Moving Your Small Business to Another State

 In Business, Legal, Tax Filing

Summer is the most common season for relocation. Given the prevalence of interstate moves in recent years, many small business owners are curious about some of the impacts that moving to a new state can have on a small business that they own. I have received several requests for consultations on this topic recently and thought some of you may benefit from an overview of considerations before moving your small business to a new state. By no means is this an exhaustive list, but hopefully, it helps you know where to start researching or what questions you might want to ask your attorney or CPA.

What is the Tax Scheme in the New State?

One of the most important things to consider when moving to a new state is how that state taxes small businesses and their owners. Many taxpayers are aware that some states do not impose an individual income tax. Texas and Florida are common destinations that taxpayers select for relocation to reduce their tax liabilities. But the discussion certainly doesn’t stop there. You may also need to consider the corporate tax rate, franchise taxes, sales tax, property taxes, excise taxes, and other factors that may completely negate any individual income tax savings that you may receive. For example, Texas has some of the highest property taxes in the country. Depending on the dollar value of the property you are looking to purchase, you could be better off in a low-tax state with more reasonable property taxes than an income-tax-free state with high property taxes.

Do You Have a Business Incorporated Under State Law?

For small business owners that have not incorporated under state law as an LLC, corporation, or other entity, the process of relocating is generally easier than if your business is incorporated. Unincorporated businesses will still have issues to consider such as payroll account registrations/terminations, sales tax account registrations/terminations, changing the business address of the entity, potentially changing banks, and other tasks related to a move. But businesses that are incorporated under state law must either file a foreign qualification in the new state or legally move the LLC, corporation, or other entity to the new state in order to operate there. Taxpayers that file a foreign qualification rather than legally moving the business usually are obligated to file taxes in both the old and new state, so most taxpayers opt to fully move the business legally. In some cases, taxpayers also may decide to terminate the old entity and start completely over with a new business entity in the new state. The best option is generally based on the specifics of the business owner’s situation.

Do You Have a Part-Year or Apportioned State or City Tax Return to File?

Most taxpayers who move from one state to another will not do so on January 1st, so usually in the year of the move, there will be part-year residency returns required on the individual tax side. For an entity with a state tax filing requirement, there may be one or more apportioned state tax returns to file. An apportioned state return simply means that the entity’s revenue, income, and other tax attributes are split between all of the states in which it conducted business in that year. In a year in which you and your business move from one state to another, be prepared for a more complex tax return filing. I would recommend getting started early in that situation, allowing at least two months of time prior to the deadline for preparation.

When is Your Final Return Filing Deadline?

In some states (and cities), when a business ceases to do business there, the state imposes a deadline for when the final return must be filed, and this date could be sooner than the typical end-of-year filing deadline. If your business ceases doing business in a state or city, be sure to check the filing deadlines for the final return and ensure that you mark the return final. If the state is not aware that it is a final return, sometimes you will continue to receive failure-to-file notices if you cease filings.

If you are considering moving your small business to another state and have questions about how it will impact you, your family, or your small business, feel free to contact me using the form below.

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