Once you've decided to incorporate your small business the next step is deciding which state to incorporate in. A common misconception is that businesses must incorporate in their state of operation. You can, in fact, incorporate in any one of the 50 states and the District of Columbia regardless of where your business currently operates.
It is perfectly acceptable to incorporate in a state other than your current area of operation, but it is not always a good idea to do so. If your company chooses to incorporate in a state outside its area of operation life becomes a little more complicated. Your business becomes a "foreign corporation" in any state outside of the state it is incorporated in. If a corporation is "transacting business" in a state other than where it is incorporated, it must register for a certificate of authority to transact business in the other state or possibly lose access to that state's courts and face fines.
Registering for a certificate of authority, of course, costs money and is only one step in the process of qualifying to do business as a "foreign corporation" in another state.
There are advantages to incorporating in different states with regard to corporate laws and tax structure. Delaware is by far the most popular state for incorporation. Most of the fortune 500 companies are incorporated in Delaware.
Some of the most attractive features of incorporating in Delaware include:
1. Lack of corporate income tax for corporations incorporated in Delaware but not transacting business in the state.
2. Delaware has a separate corporate law system that uses judges appointed for their knowledge of corporate law as opposed to juries, whose knowledge of corporate law is limited at best.
3. Shares of stock owned by persons outside of Delaware are not subject to Delaware taxes. For a small business deciding weather or not to incorporate in Delaware it is necessary to measure the cost of qualifying as a "foreign corporation" in the state of operation versus the amount that will be saved by incorporating a small business in Delaware. Typically it is not advantageous for small businesses to incorporate outside of their home state as even small businesses are usually required to pay corporate taxes in both the state of foreign operation and the state of incorporation.
Jacob Wren operates Small Business Assistance - a resource site for entrepreneurs that offers advice on small business incorporating and an array of other small business topics.
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