Can You Incorporate a Business in Any State?
The short answer to this question is “yes.” A business owner can incorporate a new corporation in any state in the United States. However, there are distinct advantages and disadvantages to incorporating in different states. For most small businesses, incorporating in the state where the business owner lives and where the business operates is the easiest and cheapest option. For larger businesses, it may make more sense to incorporate elsewhere. Read on to explore reasons why someone might want to incorporate in a state other than their home state.
Tax Reasons for Incorporating Out of State
A lot of information on the internet focuses on tax as a reason to incorporate outside of a business’s physical home state. However, a corporation is generally subject to tax in the state where it operates, regardless of where it is incorporated. For example, a business incorporated in Wyoming but operating primarily in California will still be subject to tax by California. Often, this can result in excess taxation because the corporation must pay filing fees with the state of incorporation on top of paying tax to the state where it operates. Because of this, it generally does not make sense to consider tax when deciding where to incorporate a business. Instead, tax should only factor in to deciding where to physically locate a business. For many small business owners, moving to another state to start a business is not an option, so this reason will not apply to their circumstances.
Privacy Reasons for Incorporating Out of State
Another reason often cited for incorporating out of state is privacy. Some states, such as Wyoming and Nevada, offer greater privacy to business owners by making it harder to find out who owns a corporation. However, this advantage most often applies to LLCs rather than corporations. Click here to read about the differences between LLCs and corporations. For small business owners who are concerned about privacy, an LLC might be a better option.
Legal Reasons for Incorporating Out of State
The biggest reason business incorporates in a state other than where they operate is for legal reasons. Delaware is the most popular state, by far, to incorporate. The reason is that Delaware corporate law and Delaware courts are highly developed. They are designed to handle a huge number of unique legal situations that arise with corporations. This offers owners more certainty about how the law will affect their corporation. Businesses that hope to attract sophisticated investors will often have to incorporate in Delaware because investors expect that level of certainty. However, for small businesses with no plans to attract investment from private equity, venture capital, or other large investment firms, incorporating in the state where the business operates is usually the best option.
How are Corporations formed?
The process for forming a corporation varies from state to state. Generally, states require the owners of the new corporation to fill out and file “articles of incorporation.” In some states, this document is known as a “certificate of incorporation” or “corporate charter.” Most state governments make this document available as a fillable form on a government website. States charge a filing fee, usually about $100, when the document is filed. The form typically requires the following information (but varies among states):
Name of the corporation
Address of the corporation
Name and address of an agent (the person who will receive official correspondence from the state)
The number of shares the corporation can issue
Names and signatures of incorporators
In addition to the articles of incorporation, most states require corporations to have “corporate bylaws.” Bylaws provide rules for how a corporation is structured and how it will operate. It describes the rights and responsibilities of shareholders, directors, and officers.
Many websites offer affordable assistance in completing these forms, such as LegalZoom, Rocket Lawyer, and LawDepot.
