In which state should I incorporate?

When deciding in which state to incorporate, it is necessary to consider many different factors. The ultimate choice will depend on the particulars of your business’s situation and needs. First, you will need to become familiar with the relevant business laws in the state where your business is physically located.

Incorporating in your home state may offer many advantages. For instance, in whichever state you incorporate, you will only be required to pay ongoing fees for your business. Many business owners mistakenly think that they will save the most money by incorporating in a state with low ongoing fees.

However, when businesses have employees or a physical location outside of their state of incorporation, they are still required to register to transact business in those states (called foreign-qualified businesses). This normally subjects them to additional fees and taxes (known as franchise taxes) in their home states in addition to the ongoing fees in their state of incorporation.

By incorporating in your home state, you may also choose to forego using a registered agent. Every corporation is required to have a registered agent available during normal office hours to receive service of process. You may act as your own registered agent by naming a person at your home office if you incorporate in your home state. Still, this is not a huge factor, as third-party registered agent services normally only cost around a couple hundred dollars per year.

Often, tax considerations will be a primary factor in your decision. State tax laws and the types of exemptions that may be available to nonprofits vary widely. Frequently, the added tax costs for foreign-qualified businesses outweigh the benefits of incorporating outside of your home state. It is recommended that you forecast your business’s projected revenue for the first three to five years of operation and then do a comparison of your likely tax liability in the states in which you are interested in incorporating.

For the reasons identified above, most small businesses choose to incorporate in their home state to avoid the extra fees and compliance requirements. However, online businesses without employees or physical storefronts may still find it worthwhile to incorporate in another state with more favorable laws or tax treatment.

The following common factors need to be considered:

  • State and local laws – Determine whether they would be favorable for your business and protect your interests.
  • Investors – Often, investors will require you to incorporate in Delaware as it is the most common state of incorporation and they may be more comfortable with the business-friendly laws there.
  • Annual fees and reporting requirements – This includes a short annual report and fee in the state of incorporation as well as ongoing franchise taxes.
  • Formation fees – This is a one-time filing fee paid to the Secretary of State’s Office for the articles of incorporation. Fees typically run between $60 and $500 depending on the state and entity type.
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