The word “subsidiary” gets tossed about a lot in the world of business. But what does it really mean? A subsidiary is a company owned or controlled by another business entity (known as a parent company, holding company, or umbrella company). A parent company might own all of a subsidiary or achieve control by having a majority ownership stake (i.e., over 50%).

Because the parent company has a controlling interest, it has a say over its subsidiary company’s governance. For example, the parent company will elect the subsidiary’s board of directors.

Although a parent company may influence its subsidiary’s oversight and operations, the two companies are separate business entities responsible for their own management, debts, legal issues, and other matters. Most parent companies and their subsidiaries are set up as C Corporations or Limited Liability Companies (LLCs).

Advantages of a Subsidiary Company

Below are some benefits of having a subsidiary:

• Helps Limit Liability – A subsidiary is a distinct legal entity from its parent company. That separation means both companies have limited shared liabilities and are regulated and taxed independently. That arrangement helps protect the holding company if the subsidiary encounters legal issues or financial hardships.
• Enables Expansion – Creating or buying a subsidiary corporation or LLC allows a parent company to expand into other markets while minimizing the overall business risks. Also, acquiring a company as a subsidiary can allow a parent company to gain specialized expertise and capabilities without doing intensive research and development.
• Pools Resources – While a subsidiary typically operates on its own, its connection to its holding company provides resources it might not otherwise have access to.
• May Have Regulatory and Tax Advantages – As its own business entity, a subsidiary corporation or LLC located in a different state or country from its parent company may benefit from more favorable regulations and tax rates. The subsidiary follows its jurisdiction’s laws and tax code rather than its parent company’s.
• Offers an Opportunity to Diversify – Many subsidiaries are operated and marketed as separate brands from their holding companies. They have their own brand identity, customer base, and reputation. Having a subsidiary gives a holding company the means to diversify its offerings and branch into different niches without creating confusion in the marketplace.

Disadvantages of a Subsidiary Company

Along with their benefits, subsidiaries have some potential downsides:

• More Complicated Accounting and Taxes – Tracking financials, managing finances, and filing tax returns for a holding company with subsidiaries can get complex. This is especially true when a holding company owns multiple subsidiaries. An experienced accountant and tax advisor can help ensure books and tax filings are correctly handled.
• Additional Costs – Forming a separate legal entity means paying a filing fee to register the subsidiary and paying fees associated with other requirements (including ongoing compliance to keep the entity in good standing).
• Introduces More Legal Considerations – Setting up a subsidiary shields a parent company from potential losses, but it can also require understanding different regulations and laws. A subsidiary must abide by the government and tax agency laws and compliance requirements specific to where it operates. Guidance from an attorney can help ensure business owners understand their responsibilities and compliance obligations.
• Might Cause a Power Struggle – When a parent company does not wholly own a subsidiary, it may struggle to influence positive change if the subsidiary is poorly managed. Decision-making must go through multiple shareholders and a proper chain of command. Even with a wholly-owned subsidiary, conflicts can occur. The subsidiary has its own management structure, and individuals may resist or resent a parent company’s intervention.

How to Set Up a Subsidiary Company

A business entity can create a subsidiary company or become the parent company of an existing business by buying majority shares.

The steps for forming a new subsidiary LLC or Corporation vary depending on the state. It’s critical that owners of the holding company carefully research the requirements and get professional guidance from an attorney and tax advisor.

Below, I’ve listed parts of the process that apply to most companies when setting up a subsidiary:

1. Approve the Subsidiary – Typically, the parent corporation’s board of directors or parent LLC’s members will vote on forming the subsidiary company at their board of directors or member meeting. The results of the vote are included in the meeting minutes. Also, a resolution (signed by the board chair or an authorized LLC member) is drawn up to make the agreement official.
2. Register the Business Entity – The subsidiary must be registered in the state where it will operate. Usually, this will be the state where it’s physically located. Through the incorporation or LLC formation process, the holding company is identified as the owner. Before filing Articles of Incorporation or Articles of Organization with the state, the subsidiary must designate a registered agent to receive service of process and other official documents on its behalf. Some states have other requirements as well. For tax purposes, the subsidiary must obtain an EIN and possibly apply for state and local tax ID numbers.
3. Create a Governance Document – Processes and procedures for operating and managing the subsidiary are formalized in corporate bylaws or an LLC operating agreement. These internal governance documents help keep everyone on the same page and prevent misunderstandings. They explain owners’ and other stakeholders’ roles and responsibilities, set rules for how the business should be run, and describe how various situations should be handled (e.g., if a shareholder wants to sell their ownership interests or members disagree with some aspect of how the company is managed).
4. Form a Board of Directors – If the subsidiary is incorporated as some form of Corporation (e.g., C Corporation or Nonprofit Corporation), it must form a board of directors according to the state’s requirements and the Corporation’s bylaws.
5. Apply for Business Licenses – As its own entity, a subsidiary is responsible for obtaining the licenses and permits required to operate the business. Depending on the industry, type of business conducted, and location, licensing might be required at the federal, state, or local level (or all three).
6. Fund the Subsidiary Company – A subsidiary needs money to operate like any business. By transferring assets to the subsidiary, the parent LLC or Corporation achieves ownership interest in the company. The subsidiary will issue a stock certificate (if a Corporation) or an LLC membership certificate (if a Limited Liability Company) to the parent company.
7. Keep Up-to-Date Financial Records – Both the parent company and the subsidiary must record any transactions between the two. A subsidiary will maintain separate accounting records as well as have its own financial statements, and its parent company might need to include them in consolidated financial reports. The accounting rules regarding consolidated reporting that a parent company must follow depend on the type of business and percentage of ownership in the subsidiary.
8. Maintain Compliance – A subsidiary must comply with all relevant business compliance requirements. These may differ depending on the state, business entity type, and other factors. CorpNet’s online compliance monitoring tool can help ensure business owners don’t overlook their responsibilities (such as renewing business licenses, filing annual reports, and holding annual meetings).

Subsidiary FAQs

What is a wholly owned subsidiary?

When a subsidiary is 100% owned by a parent company, it’s called a wholly owned subsidiary. The parent company holds all common stock in the subsidiary, achieved by either forming the subsidiary or acquiring full control of the company. In a wholly owned subsidiary, the parent company has direct control over appointing the subsidiary’s board of directors, thus giving it a high degree of influence over the subsidiary company.

What’s the difference between a subsidiary and an associate or affiliate company?

When a business has partial but not majority ownership of another company, the company is referred to as an associate or affiliate company. Generally, an associate or affiliate company has between 20% to 50% ownership.

How is a subsidiary company different from a branch?

The most significant difference between a subsidiary and a branch is legal separation. A subsidiary is its own legal entity whereas a branch is an office or other physical presence that a company sets up at a location other than its primary location. A branch is considered the same legal entity as the main business. Therefore, the parent company controls all aspects of the branch and is responsible for all legal and financial debts of the branch.

Can a subsidiary be a Corporation or LLC?

The parent company decides on its subsidiary’s legal business structure. Both legal, tax, and administrative considerations will affect the decision. Both LLCs and Corporations limit the liability of the parent company, but those structures are taxed differently and have different startup and ongoing compliance obligations.

Does a subsidiary’s holding company have to be a Corporation?

No, limited liability entities may also be holding companies. Note that some states restrict ownership, prohibiting trusts from owning stock in a subsidiary. Other restrictions might also apply depending on the state’s laws.

Can a subsidiary be an S Corporation?

An S Corporation cannot be owned by a C Corporation, LLC, Partnership, or another S Corp (with a few exceptions). Therefore, under most circumstances, a parent company cannot have a subsidiary set up as an S Corporation.

Do subsidiaries file their own tax returns?

By default, a subsidiary that is a Corporation must file its own tax return. However, by filing IRS Form 1122 (Authorization and Consent of a Subsidiary Corporation to be Included in a Consolidated Income Tax Return), a subsidiary corporation may opt to be included in a consolidated income tax return filed by its parent corporation.

Because a subsidiary set up as an LLC is a pass-through entity, its profits, losses, and tax obligations flow through to the parent company and are reported on that LLC’s or Corporation’s income tax return.

In addition, some states may require LLCs to have separate filings between parent and subsidiaries for Franchise Tax or other state income tax based on gross sales or net income for doing business in said state.

What are some real-world subsidiary examples?

Many well-known corporations own subsidiaries which you may or may not be aware of. I’ve listed a handful of examples below sourced from the companies’ most recent (as of this writing) annual reports filed with the SEC. Note that the corporations mentioned have far more subsidiaries in addition to the examples I’ve shared.

Coca-Cola Subsidiary Examples Include:

• Atlantic Industries
• BA Sports Nutrition, LLC
• Energy Brands, Inc.
• European Refreshments Unlimited Company
• The Coca-Cola Export Corporation

McDonald’s Subsidiary Examples Include:

• McDonald’s Deutschland, LLC
• McDonald’s Restaurant Operations, Inc.
• McDonald’s USA, LLC
• McDonald’s Real Estate, LLP [United Kingdom]
• McDonald’s Restaurants of Canada Limited

Apple, Inc. Subsidiary Examples Include:

• Apple Insurance Company, Inc.
• Apple Korea Limited
• Apple Operations Limited
• Apple Sales International Limited
• iTunes K.K.

Ford Motor Company Subsidiary Examples Include:

• Canadian Road Leasing Company
• Ford Component Sales, LLC
• Ford European Holdings, Inc.
• Ford Holdings, LLC
• Ford Motor Company Limited

Is a Subsidiary Right for You?

That’s a question that demands some significant thought and research. I recommend that business owners talk with an experienced attorney and accountant or tax expert to explore whether a subsidiary arrangement or other approach to structuring multiple businesses will be most advantageous. When it comes to the legal, financial, and tax implications, there are no such things as being too informed or prepared.

Does your accounting business need a blog? The answer is yes! Website content like service pages and blog posts help your business rise in the search engine rankings and this means more people will find your website and inquiry about your service offering. So, if your business website doesn’t have a blog, it’s time to create one.

If you already have a blog, are you keeping it current? When potential clients see a website with an outdated blog, it immediately gives them cause for concern. But, you may be thinking, you’re so busy running your accounting business, you don’t have the time to create and maintain a blog. Why not hire a ghostwriter to write some, or even most, of your posts? By choosing the right ghostwriter to outsource your content marketing to, you can multiply its effectiveness while saving yourself time.

Getting Started With Your New Blog

Professional services businesses have a specific set of challenges when it comes to marketing and content creation for your website. Unlike retailers selling a product, your accounting business is a knowledge-based service and it is burdened with selling intangible items. So how can you make your website content stand out?

Before you can look for the perfect ghostwriter, you need to decide what kind of content marketing plan you want to have. This would include things like topics you’d write about, your target audience, the frequency of posts, and the tone of voice you’d like to have. When thinking through this content plan focus on the people you want to help, the problems they have, and how you can help solve those issues.

The tone of your content is important because it conveys your personality and the way your firm treats clients. If you want to be the down-to-earth, neighborly accountant, make sure you highlight that aspect of your personality in your posts (especially videos and podcasts). If you want to portray more of a professional and business-like personality, you should take a more formal tone.

Here are five essentials for creating quality website content:

1. Timing – The best way to attract eyes to your content is to make your subject timely. Try tying your content to something recent in the news.
2. Relevance – Not every topic is relevant to all clients. To make sure you offer something for everyone, cover a wide range of topics. Regularly check your website’s analytics to see what topics get the most traffic, and write more on the same subjects.
3. Interesting – This is where a great ghostwriter can really make your content shine. It’s not always easy to make accounting topics interesting, so you’ll need a talented writer with a conversational touch.
4. Educational – Readers should always learn something from your content, whether it’s 10 mistakes not to make when filing taxes, or that you’ve hired a new associate with small-business expertise. The more you can educate prospects, the more you’ll gain their trust and convert them into paying clients.
5. Call to action – Content exists in order to get a response from your reader. To help your content generate leads, offer them something of value in return for clicking on a link, or link to more information on your website.

Even if you hire a ghostwriter to handle the actual writing, you need to keep up-to-date on what marketing efforts are working. Google Seach Console and Google Analytics are two free tools that will help you monitor your website traffic. This will help you adapt your plan and content to increase traffic and website conversions.

Once you have your blog style and content planned out, you’ll need to explain your goals for the blog to your potential ghostwriters. Yes, SEO is important for lead generation, but you also want to portray your thought leadership and problem-solving skills.

Finally, make sure the ghostwriter understands your target audience. If your accounting business specializes in a certain industry or client demographic, for example, make sure you have background materials or buyer personas to share with your writer.

3 Tips for Choosing a Ghostwriter

Now it’s time to find a ghostwriter. Don’t try to rush this process. After all, this person (or people) will be writing under your name and/or the names of your staff. It’s essential to make sure the person’s writing fits with your company culture and your blog style.

There are thousands and thousands of freelance writers looking for opportunities to write for your blog. To find some, ask other business owners for recommendations, or take a look at freelancer marketplace websites such as Upwork and Freelancer.

You can also reach out to bloggers you enjoy reading who have the tone and style you seek. Find out their rates and see if they’re interested in writing for your blog. Most blogs have contact information for their bloggers, or you can reach out to them on social media.

While financial or accounting knowledge is a plus, it’s not necessarily essential. Plenty of people who understand accounting can’t write about it—but a good writer can learn about, and write about, any topic.

1. Ask for Writing Samples

Once you have some possible bloggers in mind, ask for writing samples or places you can find their work online. Ask your candidates to write a sample blog post for you, either on spec or for a low rate, as a test.

Give the writer all the information you can on what you want to see, such as:

• Tone
• Word count
• Links to include
• Important points to make
• Keywords to use
• Other style guidelines such as subheads and meta descriptions

A test run is important to find out if the freelancer can write, follow directions, and meet deadlines. You never know if the samples you were given were heavily edited until you assign an original topic. You don’t want to have to edit every piece before it gets posted, so look for someone with strong self-editing skills.

2. Establish a Budget

Set a budget for your blog before you start looking for a ghostwriter. Content costs range from very cheap (usually poor-quality items from content farms) to $1 to $2 per word for more experienced writers.

If you like a writer but their price is too high, perhaps they can do fewer, but better quality blogs for you. If the price you’re willing to pay is below their usual rate, some bloggers will reduce their prices in exchange for steady work.

Don’t expect to find a quality writer who understands accounting at a discount rate. You’ll want to spend the money to find the best person to properly promote you and your service offering.

3. Set Clear Expectations

Once you find the right person (or people), set up a schedule for turning in posts. Will you give them access to your website software to add the blog posts? Or will someone internally manage, edit, and post the posts? Will the writer provide photos, or will you do it? Either way, make sure you are licensed to use any photos that run on your site and that you credit the photographers properly.

Before working with a ghostwriter, always create a contract specifying that you own the content they write. Don’t forget to keep a keen eye on everything content related. Your content represents you and your business.

Over time you’ll likely develop a relationship with your ghostwriters. As they become more familiar with you and your business, they’ll become more like a partner, and be able to suggest topics, as well.

Expanding Your Reach

Finding partners is key to your accounting firm’s success. One of the reasons outsourcing your content makes good fiscal sense is that it frees you up to do what you do best—taking care of your client. Teaming up with CorpNet, which offers incorporation services (and more) in all 50 states, enables you to take better care of your clients—offering them more services.

For instance, if you become a CorpNet Reseller you get wholesale discounted pricing on CorpNet’s extensive lineup of services, such as:

• Creation and Filing of Articles
• Federal Tax ID Obtainment (Form SS-4)
• Tax Elections (Form 2553 and 8832)
• Registered Agent Services
• Customized LLC and Corporation Kit
• Customized Bylaws, Meeting Minutes, and Resolutions
• Business Licenses and Permits
• Annual Filings and Business Compliance

Once you sign up for the program, CorpNet securely manages your client’s compliance documents, alerts you to important compliance deadlines, and makes filing an annual report or renewing a registered agent so much easier and less time-consuming.

How many of your bookkeeping clients are business owners outsourcing their accounting tasks to you? If you’re lucky, probably quite a few, since small and large businesses alike have plenty of complicated financial needs. Smart business owners know that outsourcing tasks not in their wheelhouse are a great way to free up valuable time that can be better used to grow their businesses.

Just as with your clients, wearing all the hats in your bookkeeping business is not the best use of your skills. When does hiring an expert help make more sense for your needs and your bottom line? Here are seven areas of business you can outsource either completely or partially, depending on your needs and your budget.

Seven Business Areas to Outsource

1. Legal Issues

You will most likely need legal advice or representation at some point in your entrepreneurial career. Don’t wait until a problem arises to search for a good attorney. Have one involved in your bookkeeping business from the beginning and keep them informed of what’s going on in your company. That way, when you need them to create or look over a contract, they’ll be ready to go.

Do you have ongoing or recurring legal tasks such as business filings, licenses and permits, annual reports, and such? You can save time by outsourcing these complicated corporate compliance issues to an online service such as CorpNet. CorpNet will stay on top of all the deadlines and requirements in the state where your bookkeeping business is located and make the appropriate filings for you.

2. Human Resources

If you have just one or two employees, you might think your business’s HR responsibilities can be managed in-house. In reality, an outside HR company can actually oversee a whole range of human resources tasks you might otherwise have to outsource to multiple providers.

Depending on your business’s size and needs, these functions could include:

• Payroll processing
• Employee benefit plan management and administration
• Employee recruiting
• Training new employees
• Employment law compliance such as safety (OSHA)
• Employee health insurance
• Coordinating virtual employees
• Hiring other freelancers

Here are some popular companies and websites that assist with outsourcing human resources tasks:

• ADP
• BambooHR
• Gusto
• Paychex
• Zenefits

HR outsourcing companies generally charge a flat monthly fee or a percentage of each employee’s salary.

3. Technology Help

All things tech is probably where you’ll want to outsource most of the tasks in your bookkeeping business. It’s always smart to learn how to handle a few IT functions yourself, but when it comes to the big jobs, like switching web hosts or fixing a virus-infected computer, it makes more sense to spend the money and outsource to an expert. You can save hours of frustration and lost productivity by turning the reins over to someone in the know.

If the tasks are something you can learn yourself, make sure to ask the IT person to show you how to do it. That way, you can handle the little stuff going forward and save the big jobs for them. AMore than 31% of IT services were outsourced last year. Other commonly outsourced tech tasks include web and app development, AI and IoT, website development, and quality assurance.

Here are some popular companies and websites that assist with outsourcing technical tasks:

• Codeable
• Freelancer.com
• Guru
• Upwork

4. SEO and Content Marketing

How good is your bookkeeping business’s SEO? To find out, try searching for “accounting business,” “bookkeeper,” “CPA,” or if you cater to a specific type of client, try searching specifically, such as “small business accountant” or “restaurant accountant.” Are you satisfied with the results you get? How far down the ranks does your local accounting business show up—if it does at all? Now, try Googling your exact business name. What pops up then? Obviously, the goal is to gain SEO superstar status—and that means getting your accounting business highly ranked in search engine results when potential customers are searching for accounting firms in your community.

Unfortunately for your bookkeeping business, SEO algorithms change all the time. SEO is a tricky game that takes lots of constant attention that you may not have to give. Find an SEO expert you can keep on retainer to help you keep your website up to date on what search engine algorithms are looking for, plus get you listed on all the search directories your bookkeeping business should be listed. Will the SEO expert be able to fill your website with valuable content or can they advise you on how to find the content? Then there’s video content, which can improve your SEO and draw more traffic to your website.

Because social media plays such a big part in SEO, make sure your expert knows which platforms your business needs representation on and can give advice on what you should be posting and how often.

Common tasks outsourced for agencies for SEO and content marketing:

• Web pages
• Blog posts
• Product descriptions
• Social media posts
• Email campaigns and newsletters
• eBooks
• White papers
• Video publishing
• Search engine optimization

Here are some quality agencies to outsource SEO and content marketing to:

• Content Journey
• My Marketing Assistant

Probably the most time-consuming task for your bookkeeping business has to do with finding new clients. You might be your business’s best salesperson, which makes sense since you are the owner and the face behind the business. But when it comes to marketing, getting some expert help can really ramp up your business and bring in more new leads. When you outsource your marketing efforts, you’ll have someone on your team keeping up with the latest trends in digital media and local campaigns. You can work with a freelance marketing person or a marketing communications company, depending on your budget. Either way, the marketing experts will most likely represent many different companies. Make sure they know your industry and do not represent any of your competitors.

6. Graphic Design

You can find great graphic design help via marketplaces or via smaller agencies that specialize in handling one-off projects for clients. And the best part of these services is the quality of their work. If you pick the right freelancer for your project, you’ll be amazed at the quality of work they can produce. From full website design and logos to social media posts and slide decks, a solid graphic designer can be a big boost to your business.

Common tasks outsourced to graphic design agencies and marketplaces:

• Logo design
• Business card design
• Letterhead
• Email signatures
• Email templates
• Posters
• Website design
• Social media posts
• PowerPoing presentations
• Pitch decks

Here are some graphic design marketplaces and agencies that specialize in outsourcing:

• DesignCrowd
• DesignRush
• 99 Designs
• Design Pickle

7. Odds and Ends

You’d be surprised how many time-wasting little tasks pop up during the average day of a small business owner. Whether it’s putting together the new desk you got from Ikea or designing a new flyer for your bookkeeping business, websites like TaskRabbit and Fiverr can be the answer to your prayers. Visit these sites to put small “odds and ends” jobs up for bid to thousands of freelancers and get just about anything done on the cheap.

Where to Find Help

There are many places to find help for your business. Start by asking your fellow small business owners for recommendations. You can also check online directories and matchmaking sites for outsourcing possibilities in fields like technology, HR, and business compliance. No matter where you find your outsourcing options, be sure to check references and always use a written agreement before starting any work with them.

Quite often, my team at CorpNet fields a lot of calls and emails from business owners that want to make changes to their companies via business filings specifically wanting to file for a statutory conversion. Some changes are rather simple and straightforward, while others are more significant and substantial.

Two of the more involved type of changes some clients request are statutory conversion and business domestication. And sometimes, people confuse the two.

So, I thought it would be helpful to share some general information about what they are and how they’re different. Realize that both statutory conversions and domestications have legal and tax ramifications, so while you can gain some basic knowledge from this article, it is no substitute for expert guidance from a licensed attorney and tax advisor.

In short form, below are what each of these terms means:

• Statutory Conversion – Changing from one business entity type to another
• Business Domestication – Moving a business entity to a different state, changing its residence (a.k.a. changing its domicile)

Statutory conversion and domestication are two distinct concepts. Let’s talk about each one in more detail.

What is a Statutory Conversion?

A statutory conversion is by far the easiest way to convert one business entity type to another. The problem is not all states allow businesses to convert to another entity type without completely dissolving the company and starting a new one.

Why would business owners want to change the legal structure of a company? Different factors may influence that decision including the following situations:

• Personal liability protection
• Tax rates and allowable deductions
• Bringing on (or removing) additional owners
• Management flexibility
• Potential to raise capital for growth and expansion

The steps and documents involved in doing a statutory conversion vary from state to state and depend on a business’s current entity form and the one it will be converting to.

The steps involved in performing a statutory conversion usually include:

1. Write a Plan of Conversion.
2. Get approvals from the governing bodies (e.g., shareholders, the board of directors, LLC members) of the entity.
3. Complete the formation document for the new entity type (e.g., Articles of Incorporation or Articles of Organization).
4. Complete a Certificate of Conversion for the post-conversion entity.
5. File the formation document and certificate of conversion (and filing fees) with the state.

Because statutory conversions aren’t available in all states and the process varies in the states that do allow them, it’s critical to get professional legal guidance to ensure you understand the requirements.

Examples of Statutory Conversions

Change from an LLC to a C Corporation

As a company grows, it’s common that so does its need to raise capital to fuel additional growth. That’s why we see a lot of Limited Liability Companies (LLCs) that eventually convert to corporations. The corporate business structure allows a company to attract venture capitalists and raise money through selling stock.  For the purposes of this article, let’s look at converting an LLC that’s taxed as a Partnership to a C Corporation.

Where states allow statutory conversions, the procedure is relatively simple:

1. Prepare a plan of conversion.
2. Have LLC members approve the plan of conversion.
3. File a certificate of conversion and articles of incorporation.

Sometimes, the conversion process also requires getting a new EIN (Employer Identification Number) for the corporation.

If the state doesn’t allow for conversions, then the LLC will have to dissolve and start a new company as a corporation or complete a statutory merger. The latter is more complicated than a statutory conversion but less involved than entirely closing the business and starting a new one.

A statutory merger involves changing the LLC to a corporation, and the LLC’s members become shareholders in that corporation. After approving a plan of merger, those individuals swap their membership interests in the LLC for shares in the corporation. A certificate of merger (and any other state-required documents) must be filed with the Secretary of State’s office to finalize the process.

Beyond the conversion and business formation documents, other corporate compliance elements must be completed, too, when converting from an LLC to a C Corporation. For example:

• Drafting bylaws
• Electing corporate officers and a board of directors
• Holding a board meeting
• Issuing stock certificates

Change from a C Corporation to an S Corporation

Another request we get from CorpNet clients is to change a C Corporation to an S Corporation. One reason for this is to simplify corporate compliance obligations. Another is to avoid the double taxation that C corps undergo as corporate income is taxed at the corporate rate and then again at the individual level when distributed as dividends to shareholders. A tax advisor might suggest that the pass-through tax treatment of an S corporation would be more beneficial.

The S Corporation is a tax election rather than an actual entity change so it can be accomplished easily with a single tax form, IRS Form 2553. There is some timing to consider for making the S Corp election:

To receive S Corporation tax treatment for the entire year, a C Corporation must file IRS Form 2553 no more than 75 days from its date of incorporation or no more than 75 days from the start of the current tax year. So, if a C Corporation was formed on January 1 (and its tax year is the calendar year), it must file a 2553 form by March 15 to receive S Corp tax treatment for the current tax year.

Note that the IRS has restrictions on what corporations can elect S Corp status.

To qualify, a corporation must:

• Be a domestic corporation
• Have no more than 100 shareholders
• Have shareholders that are individuals, certain trusts, and estates (they may not be partnerships, corporations, or non-resident aliens)
• Have only one class of stock
• Be an eligible corporation (i.e., not be ineligible as are certain financial institutions, insurance companies, and domestic international sales corporations)

An LLC can elect for S Corporation status while retaining the LLC entity structure by filing IRS Form 2553. The advantage to LLC members is that only their wages and salaries paid to them from the LLC have self-employment taxes imposed. Generally, with an LLC disregarded entity, self-employment taxes (Medicare and Social Security) are applied to all business profits.

Change from a Corporation to an LLC

Corporations formed by non-U.S. citizens may at some point discover that the corporate double taxation scenario is hurting them financially. But unfortunately for them, they are not eligible to elect for S Corp status. So, how can they take advantage of pass-through taxation? The answer is to convert to an LLC.

Some states allow for statutory conversions from a corporation to an LLC, but others do not. It’s essential for business owners to check with the state (and I recommend talking with an attorney) to identify the options. Where a statutory conversion isn’t possible, a statutory merger might be. Or it might be necessary to dissolve the corporation and form an LLC from the ground up.

What is Business Domestication?

Business domestication involves transferring an LLC or C Corporation’s charter to a different state. This is another way of saying changing the business’s domicile (residence).

Sometimes, people confuse domestication with foreign qualifications. So let me take a moment to explain the difference:

• Domestication of an LLC or Corporation is when you move the business to another state. When completed, it no longer exists in the state where it was initially formed.
• Foreign qualification is registering a business in another state (or states) beyond the state in which it is already registered. With the foreign qualification ption, the business retains its residence in its original state.

Not every state allows domestication and those that do have their own rules and process. With that in mind, it’s vital that business owners check with the Secretary of State office in the state to which they want to domesticate. If domestication isn’t an option, then the business will need to form the company anew in the state to which it wants to move and dissolve the company in the state it’s moving from.

An alternative to forming a corporation in a new state and dissolving the existing corporation, business domestication offers some advantages:

1.  It has fewer tax consequences (mainly because it avoids liquidating the assets of the LLC or corporation when ceasing operations in the original state).
2. The company retains its credit history, thus giving investors, banks, and vendors more confidence in lending money or doing business with it.

Companies that are foreign qualified to do business in another state (or states) may be able to change their state of incorporation to a host state through domestication. In other words, they may be able to change jurisdiction rather than completely dissolve in the home state and re-register in the host state.

While the requirements vary from state to state, the domestication process generally involves the following steps:

1. Apply for domestication in the new state.
2. Dissolve the business in the state where it was chartered originally.

States usually ask for the following documents when a business applies for domestication:

• Articles of Domestication for the state to which the business is relocating
• Certificate of Good Standing (from the business’s original domicile state)
• A copy of soon-to-be-filed Articles of Dissolution (for the charter state)
• A Certificate of Good Standing (from the charter state’s Secretary of State)

A word of caution: Be wary of filing for dissolution before the domestication documents have been accepted. How devastating would it be to find out that you have no active business? That could potentially happen if the new state rejected your domestication application and you had already closed your business in your original state.

A Word About Business Compliance

Regardless of whether a company is doing a statutory conversion or domestication, it must make sure it fulfills all federal, state, and local business compliance requirements to operate legally and maintain good standing. Different entity types have different compliance obligations, and those responsibilities vary by state and jurisdiction, as well.

Before converting a business entity type that will have legal or tax implications, it’s wise to consult a lawyer or an accounting and a tax professional for insight and guidance. After getting that advice, CorpNet is here to help with all your business formation and compliance filings—including statutory conversions and domestications.