Companies Moving from California to Texas: What You Need to Know

Jet McGuire

June 16, 2022

This Texas Two-Step Allows for A Conversion that Retains Your Original EIN

While the vast majority of states will allow anyone to convert their corporation from its home state to Texas, of course California is unique. Unfortunately, California does not permit corporations to use the conversion process. See California Corp. Code § 1150 – 1160. However – have no fear – you can still move to Texas and bring your corporation with you.

A simple downstream migratory merger will allow you to move to Texas, bring your corporation with you, and retain the same corporate Employer Identification Number (“EIN”). This process has proven to be invaluable to our clients, those companies that have moved from California to Texas. Now, your corporation can operate in Texas under the same agreements, while retaining the same EIN – eliminating the hassle of re-qualifying with vendors and suppliers.

Long ago, before most states adopted laws permitting conversions, the most popular way to redomicile a corporation or other entity was to perform a merger. These mergers, commonly called “Migratory Mergers,” are relatively simple mergers resulting in a single corporation located in a new state. Since then, the rise of conversions permitted anyone to change their entity type or its domicile through a simple state filing process. This process vastly improved speed and efficiency for business owners looking to relocate their corporation.

Of course, California could not permit any speed or efficiency for companies moving from California to Texas. As such, California does not permit corporations to convert into any type of entity located in another state. See California Corp. Code § 1150 – 1160. Instead, to escape California using the conversion process, a corporation must first convert to another California entity type: LLC, LP, etc. Then, that new California entity can convert to an out of state entity. This often triggers tax implications and may even be considered a taxable liquidation in some instances. To top it off, processing two conversions with the California Secretary of State is estimated to take 2-4 months per conversion.

Our Houston law firm is no stranger to this scenario. The solution our team of business lawyers has implemented for several clients, companies moving to Texas from California, involves taking a blast from the past and using a downstream migratory merger. Texas is all about the “two-step” and a migratory merger is no different. Completing a migratory merger is a two-step process:

(i)                  Create a wholly owned subsidiary corporation in the state of Texas; and
(ii)                 Merge the existing California entity into that new Texas corporation.

Only the Texas corporation survives, and, as a result, you will now own a Texas corporation. This process can be completed in as little as 1-2 weeks, far faster than waiting on the State of California.

One item that typically causes our clients concern is their EIN. This number is typically considered to be the “social security number” of an entity and is used in many ways. Most of our clients maintain contracts, relationships, and other approvals associated with their unique EIN. As stated above, under a downstream migratory merger, the surviving Texas corporation will continue to use the same EIN. See Rev Proc 2018-15, IRS Pub 1635. This allows for easy continuity of business and contractual relationships after you have relocated to the great state of Texas.

Everyone is moving to Texas, don’t leave your corporation behind!