Which State to Incorporate

When it comes to incorporating a business, an excellent place to start is by analyzing why you want to incorporate. The perceived benefits of incorporating include liability protection and tax advantages.

Some states require incorporation for certain types of businesses, and some companies require a vendor company to be incorporated for the contract to be awarded.

Just as there are merits and demerits to incorporating, the state from which you file can have its own merits and demerits. Some states provide the ideal conditions for businesses, while others do not. Let's take a look at what you should watch out for when incorporating your business.

You are not required to incorporate your business in the state where you are physically located. The only considerations governing your choice of a state are the cost of incorporating in the home state against other states and taxation and corporate laws governing business in those states.

When you incorporate a business in the same state where it is physically located, it is called home state formation. The company must pay filing fees and other ongoing fees to the state of formation. While you will save some money by filing in a state with a low formation fee, that is the exception rather than the rule.

So what does this add up to? When a company that is formed in one state transacts business in another state, it is required to foreign qualify the company. The simple rule that precipitates such a course of action is that all companies that are not formed in a state are considered foreign companies.

Foreign companies have to obtain a certificate of authority from the state. Foreign companies are also required to conform to ongoing legislation and pay filing fees accordingly. The factors that constitute the transacting of business vary from state to state. In general, a bank account, a physical facility, or employees in a state all qualify for transacting business.

To get the complete picture of filing for incorporation, it helps if you can do a little groundwork. Do a little research on the states that are most likely candidates for you to file from. The state's corporate and LLC statutes will help you decide where to file from. You must be clear that the state you incorporate your business in will be the state where you can derive maximum benefits from doing so.

Some states tend to favor large corporations, while some others do not. It would help if you remembered primarily that foreign-qualified companies are taxed both in the state of formation and the states they transact business.

So, given such a scenario, what would be the best way of determining which state you want to incorporate your company in? A projection of your sales over the next few years and the taxes you would need to pay in different scenarios will give you a fair idea of which state to choose.