One of the first questions you're likely to face when you decide to incorporate is
where to locate your corporation. You are not required to incorporate your business
in the state where you're based; you can choose from any of the 50 states or the
District of Columbia. However, in almost all cases, it is advisable for a closely-held
small business to incorporate in its home state.
Several states -- most notably Delaware, Nevada and Wyoming -- are considered to
be the most corporate-friendly because of their liberal incorporation laws and
favorable taxes. Delaware, for instance, is the home of more than half of the
corporations listed on the New York Stock Exchange because of the flexibility and
protection it offers larger companies. Many of these benefits, however, are not
applicable to small businesses, and most states now have corporate statutory
protection comparable to Delaware's. Nevada, meanwhile, actively encourages out
of state firms to incorporate there by having no corporate income tax on profits, no
state annual franchise tax, and no personal income tax.
Even with these benefits, it can be more expensive and more of a hassle for you to
incorporate your small business out of state. A careful analysis of the pros and cons
can point this out. Some of the issues you need to consider include:
- Having a local presence
You need to have a local presence in the state you incorporate in. If you don't have
a physical presence in that state, you will have to hire and pay a registered agent.
An agent acts as your legal representative in that state, and is authorized by you to
make certain legal decisions. Be sure to build these fees into your analysis.
- Taxes and fees
Cost these out carefully, because the benefits are not always what they seem at
first. You will have to pay the annual franchise fee in the state where you
incorporate, but that may not exempt you from paying fees in your true home state.
To do business in your true home state, you may have to register as a "foreign
corporation" -- which gives you the authority to transact business in that state -- and
still pay franchise fees as well as income taxes. This can take away the advantage
of incorporating in a state with low or no corporate income tax.
- Legal issues
It may pay for you to run a careful analysis of the advantages and disadvantages of
each state's laws and tax structure as they relate to the needs of your business. In
addition, should you be sued, you may have to hire legal counsel and defend
yourself in the state where you are incorporated.
As with any legal decision, it may pay to seek the advice of your CPA or attorney.
These advisors will be able to help compare the benefits of out-of-state vs. in-state
incorporation, and assist you in making a decision that will best meet the needs of
your company.