Picking the State of Incorporation for Your Small Business

Although it is often assumed that you must incorporate in the state where your business resides, that is not the case. You can select any of the 50 states or the District of Columbia in which to incorporate. Your decision as to where to incorporate depends heavily

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1. The cost factors involved in incorporating in the state where your business is physically located compared to those involved in doing business as a foreign corporation in another state

2. The tax structure and corporate laws of the individual states

It is typically less expensive and involves less paperwork to incorporate in the state where your company is physically located than it is to incorporate in another state and do business as a foreign corporation in your own state. Typically, small corporations that will be doing business on a local or regional basis incorporate in the state where they are physically located and conducting business.

To incorporate in another state with the intent of doing business in that state, your business will need to qualify as a foreign corporation in that state. Qualification is not difficult and includes a company name search and the filing of a certificate of authority in that state. Additionally, if you are incorporated in another state or doing business as a qualified foreign corporation in other states, the corporation is also typically subject to taxation and annual report fees in each of those states. A drawback about doing business as a foreign corporation in another state is the possibility of having to deal with legal claims or lawsuits in that state.

For an in-depth review, read The Step-by-Step Guide to Incorporating a Business which also discusses where to incorporate. Where you expect to do business also has an impact on state taxes even in states where you aren't incorporated. Read Nexus for State Corporate Income Tax for an introduction to this vexing subject.