What’s the State of Your Business?

When forming a new business, an entity must first file articles of incorporation or articles of organization with a particular state of its choice. The articles of incorporation and articles of organization are often referred to as the new entity’s “Charter” document. The state in which the business chooses to file and organize under, will bind the internal affairs and governance of the business to its state-specific laws. Depending on what type of entity is formed, the business may be subject to the state’s general personal jurisdiction, i.e., may be sued in that state for any of its liabilities, even if the business has no office or does not operate any business in that state. For example, a corporation is subject to a state’s general personal jurisdiction in two or more places where it is “at home” – in each state where it is incorporated in and in the one state where the corporation has its principal place of business. For general and limited partnerships, the partnership will be subject to a state’s general personal jurisdiction where each of its partners is a citizen.

If a business is organized in a particular state but has its principal place of business and operates substantially out of another state, that other state will recognize the business as a “foreign” entity. The business must follow state-specific procedures in order to register as a foreign entity in the other state or else the business will not be authorized to do business in that state. Organizing as a foreign entity in another state requires hiring a new registered agent in that state and filing the new state’s foreign entity charter document.

Certain business decisions, tax consequences, and other opportunities may prompt a company to reorganize or relocate its charter-state. The process of relocating a business’ charter-state is called “domestication."

It was not until July 2018 that Illinois allowed corporations and other unincorporated entities to domesticate to and from Illinois. The Illinois Entity Omnibus Act makes it possible for business corporations, medical corporations, nonprofit corporations, professional service corporations, general partnerships (including limited liability partnerships), limited partnerships (including limited liability limited partnerships), and limited liability companies, to domesticate to and from Illinois. 805 ILCS 415/102.

Under the Illinois Entity Omnibus Act, a domestic entity may become a domestic entity of the same type in a foreign jurisdiction if the domestication is authorized by the law of the foreign jurisdiction. Alternatively, a foreign entity may become a domestic entity in Illinois if the domestication is authorized by the law of the foreign entity’s jurisdiction of organization. 805 ILCS 415/301.

An Illinois domestic entity must then approve a plan of domestication laid out in the Illinois statute, while the domestication of a foreign entity is not effective unless it has been approved in accordance with the law of the foreign entity’s jurisdiction. 805 ILCS 415/302-303. After, a statement of domestication (Form EOA 305) must be signed on behalf of the domesticating entity and filed with the Illinois Secretary of State.

Once the domestication becomes effective, among other things, the entity is organized and subject to the laws of the new-charter state and is the same entity without interruption. Further, all property owned by the domesticating entity continues to be vested in the domesticated entity and all liabilities of the domesticating entity continue as liabilities of the domesticated entity. Unlike previous law, domestication does not require the entity to wind up its affairs and does not constitute or cause the dissolution of the entity.

If you are moving your business to another state and would like to discuss this topic further, please contact attorney Frank Portera at (847) 705-7555 or fportera@lavellelaw.com.