Toyota Motor North America, Charles Schwab, and famously Elon Musk’s Tesla recently joined the hundreds of companies transferring their headquarters out of California and into Texas. Many small- and mid-sized businesses are following suit, relocating from high cost-of-living states like Florida, California, or New York into business-friendly Texas.
What’s the attraction? While there are many benefits of moving business to Texas, chief among them is the absence of state income taxes. Hendershot Cowart P.C. can help you relocate your limited liability corporation (LLC) to Texas in the most tax-effective way possible.
How Do I Transfer My LLC to Texas?
If you want to operate your LLC in Texas, there are a few ways to do so. Depending on your situation, you will need to choose one of the following options:
- Register as a foreign entity (only advised for temporary moves or expansions)
- Convert or “domesticate” your out-of-state LLC to a Texas LLC
- Form a new entity and dissolve the out-of-state entity
- Set up a Texas LLC and then merge your out-of-state business into it.
Each option has advantages and disadvantages, as well as unique tax implications. For example, conversion or domestication lets your LLC continue without interruption and offers automatic property conversion, but your liabilities and obligations outside of Texas will continue to exist.
Meanwhile, dissolving your out-of-state business and forming a new one in Texas gives you a fresh start, but you may have to pay start-up costs all over again.
No matter what you decide to do, you will need to determine the potential tax responsibilities that your business will have once registered in Texas, and we can help. Hendershot Cowart P.C. has experience with Texas LLC conversion and Texas LLC domestication. We can help you transfer or move your LLC to our business-friendly state – or start something new. We also have extensive experience with mergers and acquisitions.
Why Are Californians and Other Out-of-State Residents Moving Their Businesses to Texas?
Tax conditions are one of the many benefits of transferring a corporation from California to Texas. Unlike California – and many other states across the country – Texas has 0% corporate income tax and 0% personal income tax.
Texas is also one of the most business-friendly states in the union, and the cost of living is particularly low compared to states like California, Florida, and New York. Office space is more affordable, there are fewer government regulations, COVID-19 restrictions are less oppressive than some other states, and cities like Austin, Dallas, San Antonio, and Houston boast of an impressive pool of emerging talent.
What Taxes Does an LLC Pay in Texas?
LLCs are classified by the IRS as partnerships or sole proprietorships, which means they can take advantage of pass-through taxation in which an LLC’s income and expenses pass through the owner’s personal tax returns. As an LLC owner, you will pay federal income tax on income derived from your LLC, but no state income tax.
Texas does impose a franchise tax on each taxable entity formed or doing business in Texas. The franchise tax is based on your LLC’s profit margin and is calculated in one of the following ways:
- total revenue times 70 percent;
- total revenue minus cost of goods sold (COGS);
- total revenue minus compensation;
- total revenue minus $1 million (effective Jan. 1, 2014); or
- Texas’ EZ computation rate (for businesses with less than $20 million in total revenue) of 0.331%.
Does your LLC have employees? If so, you will need to pay for state unemployment insurance in addition to any federal obligations. In Texas, the unemployment tax is paid on the first $9,000 that each employee earns during the calendar year. Tax rates for 2022 range from 0.31% to 6.31% depending on benefits paid and other variable rates set each year by the Texas Workforce Commission.
Finally, Texas imposes a sales tax on consumers so you will need to collect and pay a sales tax on any goods or services sold to customers in Texas.
How Much Does It Cost to Transfer or Domesticate a LLC to Texas?
The cost of transferring your LLC to Texas will depend on your unique situation. You will need to consider corporate rent, registration or conversion fees, permits and licenses, and more.
To find out how much it will cost to your move your out-of-state LLC to Texas, schedule a consultation with one of our Texas business law attorneys.
Don’t Forget to Update Contracts, Operating Agreements When Moving your LLC to Texas
When converting your out-of-state LLC to a Texas-based business, don’t forget to update your documents to reflect Texas law. Your lawyer can also help ensure your contracts, operating agreements, employment agreements, and other legal documents are enforceable in Texas.
If you want help with either dissolving a business in California, Florida, or New York, for example, and starting a business in Texas – or using a Texas-based corporation to buy out your company in another state – our attorneys are ready to assist. We handle these case types regularly and won’t waste your time “getting up to speed” on the process. We will handle your matter as efficiently and cost-effectively as possible.
At Hendershot Cowart P.C., we want to be your law firm for the life of your business. We value relationships and believe in loyalty to our clients. Collectively, we have been serving business owners and self-employed individuals like you for more than 100 years, and we have a strong record of results.
Call us at (713) 909-7323 or contact us online to tell us about your out-of-state LLC and schedule a consultation to discuss Texas LLC domestication.