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When it comes to incorporating a business,
a good place to start is with analyzing why you want to incorporate.
The perceived benefits of incorporating include liability
protection and tax advantages. Other than this, some states
require incorporation for certain types of businesses, and
some companies require a vendor company to be incorporated
in order 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.
To begin with, 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 in that
state. 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 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.
In order to get the complete picture when
it comes to filing for incorporation, it helps if you can
do a little ground work. Do a little research on the states
that are most likely candidates for you to file from. The
states’ 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. What you need to remember primarily
is that foreign qualified companies are taxed both in the
state of formation as well as the states they transact business
in.
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 along with the taxes you would need to pay in different
scenarios will give you a fair idea of which state to choose.
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