If you are tired of over taxation and over regulation in your state it actually may be better in Florida. The beaches and golf are probably better around February as well.
This brief summary outlines a generally non-taxable transaction that will move the majority of your business to Florida from State Z, a state with high taxes and regulation. The transaction described is a relatively common method of accomplishing a change of location of a business enterprise. The transaction in tax parlance is known as an “F" reorganization. It is named for a particular paragraph of a section of the Internal Revenue Code, namely IRC §368(a)(1)(F). Type F reorganizations normally involve a change in the identity or location of an entity.
Corp A is a State of Z corporation or limited liability company which has made an election under §301.7701-3(c) to be treated as an association taxable as a corporation. In addition, it has made an election under §1361 of the Internal Revenue Code to be taxed as an S corporation. Corp A desires to move to Florida and its owners cause the formation of a Florida LLC which has also elected S corporation status (“LLC B"). Corp A plans to merge into the Florida Corp And will file Articles of Merger pursuant to a Plan of Merger under each respective States’ merger statutes.
Prior to the consummation of the merger, Corp A will form a new LLC in Florida (“LLC C") and transfer to it assets and liabilities not intended to be part of the business going forward. The membership interests in LLC C will be distributed pro rata to the members of Corp A prior to the consummation of the merger. This transaction will be considered a dividend and may be taxable based on the character of items in Corp A’s AAA account.
Following the transaction, the original owners of Corp A whom we will refer to as X and Y will hold interests in LLC B and LLC C. Corp A will cease to exist.
In general terms this transaction should be tax free though there is a possibility that the distribution of the LLC C member interests to the Members could create a dividend which is at least partially taxable. The basis of the properties in each of the entities would remain the same.