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Choosing a State To Incorporate Your Business In

When you start a business, deciding where to incorporate is a big step. Your choice affects how you pay taxes, your business structure, and how you protect your personal assets. Businesses can be sole proprietorships, partnerships, or limited liability companies (LLCs). Or, you can have a C corporation (C corp) or nonprofit organization. 

Each type has different rules for things like tax returns, personal income tax, and liability protection. It's essential to understand these differences to pick the best state to incorporate your business.

One of the first considerations after a new business decides to incorporate is where to incorporate. For most small businesses, the answer may be as simple as registering in your business's home state, but questions can arise if you conduct business in another state. Following is a discussion on where to incorporate your new business.

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Register in Your Home State

A standard rule of thumb for business owners is to incorporate in the state where the corporation will do most of its business. This rule holds especially true for smaller businesses that will likely not expand significantly. It's also considerable for businesses that do not foresee conducting business outside of their home state. Incorporating your business's home state is usually the safest bet for your new business. 

When you incorporate, you file articles of incorporation or articles of organization with your state's office. This creates a business entity separate from you.

Suppose your corporation has been running for some time, and you decide you may need to conduct business in another state. As a small business owner, you can always register in another state as a foreign corporation. Each state has its own legal requirements and registration procedures for new businesses. To learn more about incorporation in your state, see FindLaw's Business Formation Resources section. This section includes a state guide to incorporation laws.

Registering in Other States: Foreign Corporations

When a business that is incorporated in one state wishes to conduct business in a second state, the corporation is considered a "foreign" corporation and may need to register prior to doing business in the second state. For this, you'll need both a registered agent in that state and to get a foreign qualification. This is extra work and cost but can be well worth it.

Different states have different tax rates and rules. For example, some businesses are better for certain types of businesses, like a tech company or a nonprofit.

Imagine that a registered New York corporation wishes to become authorized to do business in Connecticut. It will likely need to obtain a Certificate of Authority for Foreign Corporation from the Connecticut Secretary of State. Most states require that out-of-state corporations pay a filing fee in order to register as a foreign corporation. Remember, you may also have to pay taxes in your home state, too.

The Lure of Incorporating in Delaware

Delaware is famous for businesses. Many large public corporations choose to incorporate their businesses in the state of Delaware. Delaware's corporation laws have been seen as friendly to business. Why? Delaware has flexible corporate laws, a court specific to business issues, and good privacy laws for business owners. It's also easy to issue stock in Delaware, which is great for businesses planning to grow a lot.

The state has a business-friendly state corporations code, low costs of incorporation, lenient information disclosure requirements, and corporation-friendly income tax laws for corporations operating in the state. However, Delaware has a franchise tax and its own corporate tax. If you're a small business owner, think carefully about whether the benefits outweigh the costs and extra work.

For smaller corporations, balancing against these positive factors is the simple fact that, unless your corporation is physically located in Delaware, it will still need to register for operation, and likely pay income taxes, in your home state. The additional cost and time required to do so will likely negate any benefit that your small business might gain from incorporating in Delaware. 

In addition, recent trends have seen many states altering their laws to appeal to businesses, so in the near future corporation-friendly laws like those in Delaware may become more the rule rather than the exception nationwide.

Additional Considerations for Choosing Your State

Consider the following when deciding where to incorporate your business:

  • State Laws and Regulations: Every state has its own rules for businesses. These can affect things like how you run shareholder meetings, whether you need an operating agreement, and how you pay federal income tax. You might also need business licenses in certain states. You should be familiar with the different state laws before choosing where to incorporate.
  • Business Climate and Tax Considerations: Some states have a lower tax rate for businesses, while others don't tax corporate income at all. Think about how this affects your business's bottom line.
  • Accessibility to Markets and Customers: Where your customers are can influence where you incorporate your legal entity. If your business needs to be close to its market, consider incorporating in or near those states.
  • Cost of Incorporation and Ongoing Compliance: The initial cost to incorporate and the ongoing fees and paperwork vary by state. Make sure you can handle these costs.
  • Business Privacy and Confidentiality: Some states, like Delaware, offer more privacy for business owners. This can be important depending on your business type and your personal privacy needs.
  • Future Expansion and Fundraising: If you plan to grow your business or raise money, some states make this easier. States like Delaware are known for being friendly to both big businesses and startups.
  • Corporate Laws: States have different corporate laws that can impact things like your board of directors and whether you need to file an annual report.

If you are unsure or have questions, seek legal advice and the guidance of a legal professional.

Potential Disadvantages of Foreign Corporations

Incorporating your business in a different state can bring several disadvantages. To start, it often leads to more paperwork and higher costs. You'll have to comply with legal and tax requirements of both the state where you incorporate and your home state. This can mean paying annual fees and taxes and dealing with extra administrative tasks in two places.

There's also the complexity of understanding and adhering to different state laws and regulations, which can be time-consuming and require legal expertise. Additionally, you'll need a registered agent in the state where you incorporate. This is an added expense.

For small business owners, these costs and the added complexity might outweigh the potential benefits. This is especially true if their primary market or operations are in their home state. This complexity can divert attention and resources from other important aspects of running the business, potentially impacting its growth and efficiency.

What To Do After Registering Your Foreign Corporation

After registering your foreign corporation, there are several important steps to follow. First, draft and adopt your corporate bylaws. This is essential for outlining how your corporation will be governed and operated. Next, apply for an employer identification number (EIN) with the Internal Revenue Service (IRS). This is crucial for tax purposes and is required for opening a bank account under your business name. If you are unsure of any requirements, contact a lawyer and get legal advice.

Forming a Corporation? Get Support in the Process

Deciding where to incorporate and initiating the incorporation process are important steps on your business's path to success. To ensure that your new business complies with your state's legal requirements at every stage in the corporate formation process, you may wish to use a reputable business formation service or consult an experienced business attorney.

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