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!
To continue your business venture without having to pay Arizona taxes and fulfill Arizona corporate compliance requirements, the traditional options are: (1) dissolve the Arizona company and form a new corporation, or (2) form a new corporation and merge your existing Arizona corporation into it. Although many believe that it is possible to reincorporate the company as a tax free reincorporation under Internal Revenue Code Sec. 368(a)(1)(F), until now, there has been no simple transaction to do so. Traditional options required forming new companies, resulting in a new tax ID number and bank accounts, and re-establishing (or at least massaging) vendor relationships.
Recent legislation in Delaware makes it possible for entities to convert to Delaware companies (without an inconvenient merger). On August 1, 2009, Sections 265 and 266 of the Delaware General Corporation law paved the way to easy reincorporations and even made it possible for one entity type to convert to another entity type (e.g., converting a LLC to a corporation).
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.
Delaware is a jurisdiction of choice for many reasons, including low annual fees and well founded corporate law. Small business owners are fans of Delaware for an altogether different reason – mobility. Let’s say your spouse can’t stand the New York winters and wants to move to Florida. In that case, you would simply surrender the right to do business in New York and qualify the Delaware corporation to do business in Florida, a process which inexpensively maintains the continuity of your corporation.
Learn more about incorporating in Delaware. Stop by Jeff Unger’s site where you can learn more about the benefit of forming a Delaware corporation.