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Which State should I incorporate in?

One of the first decisions a business must make after deciding to incorporate involves selecting the proper state in which to incorporate. The same applies to the formation of a Limited Liability Company (LLC).

You are not required to incorporate in the state where your business operates. You can choose from any one of the 50 states or the District of Columbia.

Here are just some of the factors that should be considered when deciding where to form your incorporation:

  • The location of your physical facilities
  • A cost analysis comparing incorporating in your home state versus incorporating in another state and qualifying to do business as a foreign corporation in your home state
  • The state(s) expected to generate the most revenue for your business
  • The advantages and disadvantages of each state's corporate laws and tax structure

Incorporating in Your Home State

If the corporation is a closely held corporation that does business primarily within a single state, the state in which you conduct business (your “home state”) will be the easiest and least expensive state in which to form your corporation and, as we’ll see, will likely be your best choice.

The overall cost of local incorporation will usually be less than incorporating in another state even though it is one of the well known business friendly states that have low initial filing and ongoing fees in addition to lenient regulations and restrictions. And that’s primarily because you will still have to qualify as a foreign corporation in your home state since that is where you will be operating. That would mean appointing a registered agent to receive official notices in each state, and don’t overlook the fact that a corporation qualified as a foreign to do business in another state is subject to taxes and annual report fees from both the state of incorporation and the state in which it is foreign qualified.

Therefore, the actual advantage of incorporating in another state because it has low initial fees, less stringent regulations, or even very low or no corporate income taxes is not as great as it may first appear. It is generally safe to say that it is not a good idea for a relatively small corporation to incorporate out of state.

Incorporating in a Business-Friendly State

For large publicly held corporations that will be operating in more than one state, selecting the best state in which to incorporate is much more complex, and comparing what the business-friendly states offer does make sense. Now the decision making process calls for the expertise of a professional familiar with the laws of the jurisdictions under consideration as well as the specifics of the business.

You may be interested to see the states rated for the best and worst Business Tax Climate by the Tax Foundation, a nonpartisan tax research group based in Washington, D.C. and founded in 1937. Click here to see the Tax Foundation’s State Business Tax Climate Index.

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