Domestication Definition

Domestication involves actually moving a legal entity, like a corporation or a limited liability company (LLC), from its original state to a new state. Once the company is domesticated in a new state, it cannot conduct business in its original state.

What are the advantages of domestication over foreign registration? To begin with, it is cheaper to do business in one state than in two. After some research, some business owners find that a new state has lower corporate, sales, income, and franchise taxes than their old state. States also vary widely in how much they charge in filing fees, such as for annual reports. Additionally, paying annual fees in one state rather than two is typically preferred. 

Domestication Disadvantages

The domestication process can be expensive. Because the definition of domestication and the requirements for accomplishing it vary from state to state, it also is a complex undertaking. 

And again, it’s not offered in every state. For example, suppose a business owner was moving from Florida (which allows domestication) to Hawaii (which does not allow domestication). In that example, their corporation couldn’t be domesticated in Hawaii. The business would either close or remain domestic to Florida (and the only option to expand it into Hawaii would be to get a foreign qualification there).  

How to Domesticate a Business in a New State

Though the process may vary based on state legal requirements, the general domestication process is as follows: 

• Draft a plan of domestication (or plan of conversion) — this document outlines the steps the business will take to domesticate in a new state.
• Approve the plan of domestication — the LLC members or corporate board must approve the plan. 
• Draft documents for the original state — depending on the state, the company may need to file Articles of Domestication, a certificate of surrender, or dissolution documents. The company may need to present a draft of this document, along with its Articles of Incorporation, when filing in the new state.  
• Draft and file documents in the new state — The company will file its Articles of Domestication or Certificate of Conversion in the new state, along with any additional formation documents required. Often, the company requires a Certificate of Good Standing from its state of origin. 
• File documents in the original state — This step is especially important if the original state requires dissolution of the domesticated business. If so, the business owner would be prudent to properly domesticate the business in the new state before filing dissolution paperwork.

Of course, a business owner will need to pay any applicable fees for these filings. After the domestication is complete, it’s wise for a business owner to update the company’s operating agreement or other governing documents. 

Summary

Domestication can be a good way for a business owner to legally relocate a small business to another state. That said, business owners considering this process will need to verify that both the original state and the new state permit domestication procedures.

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