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Editorial 11 MIN READ

Foreign qualification or re-incorporation, the 2019 version

Wayfair rewired one side of the ledger, and the conversion statute rewired the other

The Editors
Staff, Incorporator.org
11 min read Updated
Contents 5 sections
  1. What Wayfair actually changed for entity choice
  2. What foreign qualification costs in 2019
  3. Re-incorporation, and why the conversion statute keeps eating its lunch
  4. How the 2019 calc actually runs
  5. Sources

wo and a half years ago the choice between foreign-qualifying an existing entity and re-incorporating in the host state was mostly a paperwork calculation. In 2019 it is a tax-and-paperwork calculation, because South Dakota v. Wayfair moved the trigger for state tax nexus off of physical presence, and because the statutory conversion statute has quietly become the right tool for a growing share of what used to be re-incorporations.

The direct answer has not changed in most cases. If the business is expanding, foreign-qualify. The interesting part of 2019 is the widening middle.

What Wayfair actually changed for entity choice

South Dakota v. Wayfair, Inc., 138 S. Ct. 2080, decided June 21, 2018, killed the physical-presence test that had governed state sales-tax collection since Quill Corp. v. North Dakota, 504 U.S. 298 (1992). By the spring of 2019, more than thirty states have either enacted or announced an economic-nexus standard for sales-tax collection, most of them tracking South Dakota's $100,000-or-200-transaction thresholds from S.D. Codified Laws § 10-64-2. California's Department of Tax and Fee Administration announced a $100,000-or-200-transaction threshold for out-of-state retailers effective April 1, 2019, by notice under existing R&TC authority, with AB 147 pending in the legislature to codify and possibly raise the floor. Texas's Comptroller has a draft amendment to 34 Tex. Admin. Code § 3.286 out for public comment that would impose a $500,000 economic-nexus threshold for sales and use tax.

The doctrinal shift on the sales-tax side is clean, and most operators have at least heard about it by now. What gets less attention is that several states have been using Wayfair-adjacent logic to expand their income- and franchise-tax nexus theories. Hawaii, starting with its 2019 legislative session, applies a Wayfair-style threshold to income tax. Massachusetts has treated in-state cookies and app downloads as sufficient for a corporate-excise-tax obligation under 830 CMR 64H.1.7 since 2017, and its logic survived Wayfair. Texas's franchise-tax nexus rule at 34 Tex. Admin. Code § 3.586 has been on the books for years and treats "doing business in this state" expansively.

For the foreign-qualification question this matters a great deal. A decade ago the honest answer to "do we have to qualify" was "probably, but we might get away with it because no regulator has noticed." In 2019 the sales-tax engines at most states auto-detect threshold crossings through marketplace-facilitator data (see our guide to marketplace facilitator laws), and the income-tax divisions of states that have adopted economic-nexus theories increasingly share the sales-tax feed. The practical result is that the business is already on the state's radar when the qualification question comes up. You do not control the timing anymore.

None of this changes the foreign-qualification default. Taxes follow the business wherever it goes, and qualification is the cheap way to make the legal entity match the tax footprint the business already has. What changes is the cost of being wrong. A company that crossed the economic-nexus threshold in six states in 2018 and did not qualify in any of them is now arguing about back sales-tax collection plus personal liability for responsible officers, plus, in a few states, an unqualified-entity penalty, plus the cost of catching up the certificates of authority. That triple stack did not exist in 2016.

What foreign qualification costs in 2019

The mechanics have not changed. You file a certificate of authority (the specific name varies) in the host state, attach a good-standing certificate from the home state, name a registered agent, and pay a fee. The fee sweep has drifted up slightly since 2016 but not by much. New York charges $250 to file an application for authority for an LLC under N.Y. Limited Liability Company Law § 802. California charges $70 for an LLC Application to Register (Form LLC-5) and $100 for a corporation's Statement and Designation by Foreign Corporation, per the Secretary of State's fee schedule at the California Code of Regulations Cal. Gov. Code § 12182. Texas charges $750 for most foreign entities filing a Form 301 application under Tex. Bus. Orgs. Code § 9.001. Florida charges $125 for an LLC (F.S. § 605.0902) and $70 to $778.75 for a foreign corporation depending on authorized capital (F.S. § 607.1502).

Annual obligations vary more than filing fees. California imposes the $800 minimum franchise tax on foreign-qualified LLCs and corporations doing business in the state under R&TC § 17941 and § 23153. Texas layers on franchise tax at 0.375% of taxable margin for retailers and wholesalers, 0.75% for others, with a $1.18 million no-tax-due threshold for reports originally due in 2019 per Tex. Tax Code § 171.002. Delaware still wants its $300 annual LLC tax at home even if the business operates elsewhere, per 6 Del. C. § 18-1107(g). The upshot is that an operating business qualified in three states now routinely pays $2,000 to $4,000 a year in state maintenance before anyone looks at federal tax.

End to end, first-year qualification in a single state for an operating LLC or corporation runs roughly $400 to $1,200 once you add the state filing fee, a commercial registered agent, a certificate of good standing from the home state, and a modest amount of legal time. Ongoing cost settles at the registered-agent fee plus the annual report, usually $300 to $700 combined, plus whatever taxes you owe for activity in that state, which you would have owed regardless.

Re-incorporation, and why the conversion statute keeps eating its lunch

Forming a new entity in the host state and dissolving the old one is still a valid move in three cases: asset or liability isolation (one LLC per property, one operating sub per high-risk product line), regulatory fit (a local professional-entity rule, a cannabis license that will not travel, an insurance line that prefers a domestic carrier), and a deliberate tax structure that needs separated entities. Outside those cases, re-incorporation is expensive and usually unnecessary, and the 2016 analysis still holds.

What has shifted is that most of what used to be called "re-incorporation" was actually re-domicile. A venture-backed LLC formed in the founders' home state needs to be Delaware before a priced round. A California parent wants to move to Nevada or Texas. A multi-member family LLC inherits a second generation and needs to move to where the owners actually live. None of these are new-entity cases. They are change-of-home-state cases, and the statutory conversion has become the right tool.

Delaware's framework is instructive because other states have copied it. 6 Del. C. § 265 allows any non-Delaware "other entity" to convert to a Delaware corporation by filing a certificate of conversion and a certificate of incorporation; the converted entity is the same legal person for all purposes, so contracts, EINs, bank accounts, and tax history come along. 6 Del. C. § 266 allows the reverse, a Delaware corporation converting to an entity of another state or to a different Delaware entity type. 6 Del. C. § 18-214 handles conversion of a non-Delaware entity to a Delaware LLC; 6 Del. C. § 18-216 handles a Delaware LLC converting out. For cross-border domestication of a non-U.S. entity there is 6 Del. C. § 388. Legal continuity is explicit in each of these sections: "for all purposes of the laws of the State of Delaware" the converted entity "shall be deemed to be the same entity" as the converting one (§ 265(f), § 266(h), with parallel language in Title 6).

Roughly two dozen states now have comparable conversion or domestication statutes. A short, non-exhaustive list as of early 2019: California (Cal. Corp. Code §§ 1151, 17710.01 et seq.), Texas (Tex. Bus. Orgs. Code §§ 10.101 to 10.110, the "conversion" chapter), Florida (F.S. § 607.11920 for corporations, § 605.1041 for LLCs under the 2013 revised LLC act), Nevada (NRS 92A.195 and 92A.205), Wyoming (Wyo. Stat. § 17-26-101 continuance and §§ 17-29-1001 et seq. for LLC conversion), Washington (RCW 23.95.500 to 23.95.545, the entity transitions article of the 2015 Washington Business Organizations Code), New Jersey (N.J.S.A. 42:2C-80 for LLCs), Colorado (C.R.S. § 7-90-201.3 conversion, § 7-90-201.5 domestication), Illinois (805 ILCS 180/37-40), Massachusetts (M.G.L. c. 156D § 9.50 for corporations, c. 156C § 65 for LLCs), Michigan (M.C.L. § 450.2745 conversion, § 450.4708 LLC), North Carolina (N.C.G.S. § 55-11A-11 domestication, § 57D-9-20 LLC conversion), Minnesota (Minn. Stat. § 302A.681 and § 322C.1001), Virginia (Va. Code § 13.1-722.10 and § 13.1-1074), Arizona (A.R.S. § 29-2401 LLC conversion), and Pennsylvania, whose Title 15 was substantially rewritten in 2014 to add conversion, domestication, and division across entity forms at 15 Pa. C.S. § 351 et seq.

The mechanical requirement on all of these is that both the origin state and the destination state must permit the move. Where both do, the cost is meaningfully lower than a new-formation-plus-dissolution path. A typical corporation-to-corporation conversion from a home state into Delaware runs roughly $1,500 to $4,000 in combined filing fees, legal work, and registered-agent setup, with no federal income tax consequence under Rev. Rul. 2004-85 if structured as a pure change of form. A new-entity-plus-dissolution path typically runs $3,000 to $8,000 once contract assignments, license re-applications, bank-account reopenings, and EIN renumbering are added up, and the tax analysis is genuinely harder. Contracts assigned to a new entity are contracts; contracts that ride through a statutory conversion are the same contracts.

Two mismatches still break the tool. A handful of states do not permit conversion to or from their forms: Alabama's treatment is narrow; New York did not allow cross-border conversion of a New York LLC into another state's LLC under the pre-2018 LLC Act, and the legislative fix has been pending rather than enacted. Where the origin state will not let you out, the only path is reverse merger into the new entity, which is usually tax-neutral under IRC § 368(a)(1)(F) if the transaction is structured as a mere change of identity, form, or place of organization, and is occasionally a better tool than conversion anyway. Either path is still materially cheaper than forming a new entity de novo and dissolving the old one.

How the 2019 calc actually runs

Work through it in this order.

First, decide whether you are expanding, relocating, or dividing. An expansion that adds a state to an already-multi-state footprint is a qualification question. A relocation that moves the center of gravity from one state to another is a conversion question. A division that puts a specific risk or product line into a separate shell is a new-entity question. Mis-categorizing the situation is the most common expensive mistake, and it usually produces re-incorporations that should have been conversions.

Second, check whether the economic-nexus thresholds in the states you touch have already been crossed. If they have, tax is going to follow whether or not the legal entity is qualified, and the only question is whether to make the legal structure match the tax reality. Marketplace-facilitator reporting now gives state departments of revenue enough data to audit the question without any effort on their part.

Third, price the paths with current numbers. Foreign qualification in the typical case lands in the low four figures for first-year cost and the high three figures on an ongoing basis. Conversion into a new home state lands in the mid four figures once and then collapses into the home-state maintenance. Full re-incorporation lands in the high four figures to low five figures once, plus the cost of everything that needs to be re-papered.

Fourth, check the regulatory posture in the destination state before choosing a path. A few industries (professional services under California's Moscone-Knox Professional Corporation Act, Cal. Corp. Code §§ 13400 to 13410; cannabis under state-specific licensing regimes; health-care arrangements under state corporate-practice doctrines; some insurance lines) refuse to travel through qualification, conversion, or both, and those rules beat any general analysis.

The rule of thumb, now with a wider middle: if the business is expanding its footprint, foreign-qualify; if it is changing its home state, convert under 6 Del. C. § 265 or the parallel statute, not re-incorporate; if it is carving out a genuinely separate risk or regulatory posture, form new; and if Wayfair already pulled the business into three states' tax rolls, qualify before a state auditor asks why you didn't.

Sources

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