Once you've decided to incorporate your new small business, one of the first things you need to decide is where to incorporate your business: in which state is it best for you and the business? It's a critical question. Where you incorporate can impact your business in a lot of ways, like where you'll do business, how much business you'll do, and perhaps most important, how you and the corporation will be taxed.
State laws govern exactly how corporations are formed - like what papers have to be filed and where - and the things your corporation will have to do in order to maintain corporate status - like what records you have to keep and how many shareholder meetings you need to hold. These things should play a big role in your decision of where to incorporate. So, it's critical that you carefully examine the laws of the states that you're considering.
Some Things to Consider
Many factors need to be looked at when you're trying to choose between different states for incorporating your business, such as:
- The average amount of rent for commercial space, land prices and construction costs
- Available transport services, such as railroads, airports and trucking companies that can be used to ship your goods or bring you raw materials
- The skills of the local, available labor pool and the wages that they're accustomed to being paid
- Property tax rates
- Whether state and local authorities are willing to give you reduced rates on things like property taxes, utilities and licensing fees and taxes
- The types and number of licenses and/or permits you'll be required to get in order to conduct business
Stay at Home?
For many new businesses, it's best to incorporate in the "home state," that is, the state where the corporation will do most, if not all, of its business. Small businesses often do their business within a single state. But, you're not necessarily tied to the home state forever.
If you incorporate in your home state, and later you decide that there are business opportunities for you in another state (or even in several other states), you can file an application to do business in the state. A "foreign corporation" is one that has been incorporated in one state but is allowed to do business in another state.
Becoming a "foreign" corporation isn't free or a simple matter. You'll have to "register" the corporation in the other state, which includes filling out certain paperwork and paying a fee, and you'll have to pay for any necessary licenses and permits. Also, keep in mind that if you incorporate and do business in one state and also do business in another state as a foreign corporation, you'll likely have to pay income taxes in both states.
So, you need to be certain that the time and expense you'll have to invest in qualifying as a foreign corporation will be outweighed by the benefits of doing business in the foreign state.
Delaware and Other States
Delaware has been the leading state of incorporation since the 1920's. It is the corporate home for more than half of the Fortune 500 companies and more than 40 percent of the corporations listed on the New York Stock Exchange. Furthermore, of the publicly-traded corporations that have reincorporated since the 1920's, more than 80 percent have reincorporated in Delaware.
The most often-cited reasons for Delaware's popularity are:
- A flexible and frequently revised body of corporate laws, particularly laws about things like the election of directors, charter amendments, shareholders' meetings and stock dividends.
- A legal system highly responsive to the needs of corporations. Lawsuits involving corporate law are tried before a special Delaware court, called the Court of Chancery, with judges, many of whom were former corporate lawyers, who are considered to be well-versed in corporate law issues. Also, Delaware corporate lawyers are highly specialized and have expertise in planning complicated business transactions.
- A comprehensive body of corporate case law. Delaware's large and relatively stable body of judicial precedent on sophisticated corporate law issues provides corporations with greater certainty in predicting the legal outcomes of their decisions.
- There is no Delaware corporate income tax for corporations that are organized in Delaware and don't do business in Delaware.
Other states are gaining popularity, such as:
- Nevada, which has no corporate or personal income tax, favorable property tax rates, and, unlike most other states, it does not share corporate tax information with the Internal Revenue Service (IRS)
- Wyoming, which also has no corporate or personal income tax and doesn't share information with the IRS, and has low filing fees