Best State to file your incorporation

Normally, you form a corporation in the State where your business is located or headquartered. You may have a factory, office, or store. There are many reasons why you may want to file your incorporation in a particular state. You might live in that State, for example. 

You might be looking to incorporate your business in other States because you were told certain States are better for shareholders and rules. Some States will protect the privacy of Officers and Directors more than others, and some States have no State income tax.

In this article, we take a look at which state you should choose to register your business in.

Which State to Form a Corporation?

If you are doing business in a State, even one that has high-income taxes, or that doesn't protect your privacy, then you will ultimately have to either incorporate in that specific State or register in another. You still need to register in the State where you operate as a foreign corporation. 

The term foreign here does not mean a different country but State. If you incorporate in Delaware or Nevada but operate in California, then you will be required to operate in California as a foreign corporation. 

You will not save on minimum taxes with incorporation in a different state to the one in which you reside. If you are trying to avoid paying a minimum tax like California's current minimum tax to the Franchise Tax Board of $800.00 per year, incorporating in a different State will not save you those minimum taxes. 

A foreign corporation has to pay the minimum tax. If you lease a space, offer your services from a location within a State, want to defend yourself in a lawsuit, or pursue a lawsuit in a State where you are doing business you must be registered in that specific State.

What is Domestic Incorporation? 

The State where you originally incorporate is known as domestic. If you are forming a Limited Liability Company in California and file your articles of incorporation in California, you will be a California corporation. In any other State, you will be seen as a foreign corporation in that particular State. 

By doing any business in a different State, you will more than likely need to register as a foreign corporation in that State and follow the rules in that State as well as where you originally incorporated.

Delaware incorporations are famous because they are an original colony and State. Their rules related to incorporation have hundreds of years of history. This means almost every issue you can imagine was litigated and decided. As Courts generally follow prior laws, known as precedents, the Court rules can be counted on to continue in full force and effect. Essentially if something happens you will know the outcome. 

Delaware has many rules that can protect a minority shareholder. Thus, if the corporation is attempting to take over the corporation and you aren't interested in selling you have additional rules to protect your rights. This is why many corporations incorporate in Delaware.

The Best State to Form a Corporation

You might be wondering which is the best state to form a corporation and where there are the most Incorporations by State in 2023. Whichever state has the most incorporations, at the end of the day, to avoid paying multiple fees and following the rules of many States you should incorporate where your business is located. 

You will be taxed in the State where you are a resident and will be taxed based on your customers and clients locations as well. Going to Florida or Texas to incorporate if your factory is in California or New York will not save you as much as you think yearly. 

If you live in a State with no income tax then that's a good place to form a corporation.

Selling Your Business in the Future

If you plan on selling your business, capital gains is another tax that you want to lessen or avoid but you still must be a resident of a State with low capital gains taxes. Everyone pays federal income taxes so this is not considered as an advantage.

Some States allow you to nominate directors or officers to serve. Many private people incorporate in these States so they do not have to identify themselves on public documents in those States. Of course, if you are doing business in another State and are required to register as a foreign corporation in that State you will have to disclose the true directors and officers negating the advantage of nominating others.

FAQs

What is a foreign LLC?

The state you choose to form your corporation in refers to your business as a domestic corporation. For all other states your business will be considered a foreign corporation. If you decide to expand and set up a branch of your business in another state, you will need to register with the Secretary of State as a foreign corporation.

What is the form of business ownership that is the most complex to form?

Whichever business entity you choose to use you will need to make sure it is the best option for your business. For example, a doctor can only set up a professional corporation and is required to be registered. Each type of business entity has it's own set of procedures, documentation and laws that you will need to adhere to.

Final Word

There are a multitude of items you need to know before deciding where to incorporate your business. One aspect is to consider in which state to form a corporation. The answer is generally quite straightforward, the one in which you reside.