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Converting an out-of-state business to a Texas entity

Since the pandemic began, Texas has been the destination of choice for many businesses, particularly medium to large corporations looking to relocate to a friendlier state to do business. More than 60 big companies moved to the Lone Star State in 2021, and in June, Caterpillar Inc. announced it would shift its global headquarters from Deerfield, Illinois, to Irving.

The reasons for these relocations are many, which we previously shared in a report released by YTexas. But just because a company moves operations to Texas does not mean it automatically receives all the benefits of doing business here. Many so-called “foreign” companies that are eligible elect to convert to a Texas entity through a process known as conversion.

How does conversion work?

The Texas Business Organizations Code (BOC) allows foreign or out-of-state companies to file with the secretary of state’s office to convert to any of the following Texas entities:

  • Corporations, including professional, for-profit and nonprofit
  • Limited partnerships
  • Limited liability companies
  • Cooperative associations
  • Professional associations

Eligible foreign entities must file the necessary paperwork both in Texas and in their original state of formation. In addition, the BOC requires the following documents:

  • Plan of conversion: This document includes the current name of the company, the name it will use in Texas, the entity type, cap table and tax information and other details.
  • Certificate of conversion: This includes the full plan of conversion or a mention of it, along with a statement that it has been approved in the state where the company was formed.
  • Certificate of formation: This document must be included in the plan of conversion along with a statement that the new Texas entity is being formed under the conversion process.

Often tax filings are required in the original state and there may be a need to consider other changes such as licenses.

Determining whether a business is eligible for conversion

A streamlined direct conversion under state law is not allowed for entities formed in every state. If your entity’s current domicile is in one of those states, there may be other tax-advantaged transaction structures available to accomplish the same goal. Another option is to remain in the original domicile and simply register in Texas as a foreign entity. However, that approach would not relieve the business from ongoing filing and tax requirements in the original state.

Conversion is generally an attractive option for business owners who move their companies to Texas as it frequently results in a lower tax burden on the business. If you are moving or intend to move your business to Texas, it is advisable to consult with an experienced business attorney with extensive experience in the conversion process.

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