Incorporation Kits & More

Which is the best state to incorporate in?

The question, "which state should you choose for incorporation?" is a perennial one. People know you aren't limited to incorporating in your home state. People also know that different states display varying degrees of friendliness towards business. And people also know that some states are, well, rather money-grubbing when it comes to taxing small businesses, entrepreneurs and people who work hard.

One can try to answer the "which state" question in general terms, using rules of thumb and good business and legal "theory." But what I thought might make sense here is to try and answer the question for specific categories of incorporators.

Which state should you incorporate in if you'll raise venture capital or go public

If your corporation plans or hopes to someday go public or you will raise capital from outside investors such as venture capitalists, you probably want to choose Delaware. The reason is that you'll get the best corporate legal environment in Delaware. Delaware has the most sophisticated corporate laws and legal system in the country. If you're planning on playing with the big boys, you may as well do things right from the very beginning.

Caution: If you're going to incorporate in Delaware as a first step in building a large corporation funded by outside investors, you also want to work with a large law firm who specializes in this area. You'll spend several thousand dollars (if not more) getting your corporation setup. But you'll have built a foundation that'll support something much better.

Note: You don't need to use Delaware for small corporations that will be financed by the owner. Delaware is overkill in this situation. Using Delaware for a single-shareholder corporation is akin to buying a 18-wheel tractor trailer rig because a couple of weekends a year you go to Ikea and need a way to take home your purchases.

Which state should you use if you'll have one owner and one state of operation?

If you'll have one owner or all owner-operators and the business will operate in one state, you want to incorporate in that state. For example, if you live and the business will operate in California, you should incorporate in California.

Tip: People sometimes wonder about incorporating in a low-tax state other than the state where the owner lives or the business operates. That doesn't actually work unless you break the law. See the FAQ article, "Does incorporating in Nevada actually save taxes?" for an explanation of why this technique doesn't work.

Which state should you incorporate in if you're moving in near future

If you currently live and operate your business in one state but will sometime in the near future move to another state and operate your business there, selecting the right state for incorporating can seem tricky. But typically what you should do in a situation like this is incorporate in the other state (the one you'll later move to) and then register this corporation as a foreign corporation in your current state.

For example, say you live and currently do business in California but plan to move to Texas and once moved will operate from Texas. In this sort of situation, what you probably want to do is form your corporation in Texas and then register your Texas corporation as a "foreign corporation" in California.

While you live and operate in California, you'll have to file California tax returns for the Texas "foreign corporation" and pay California income taxes. But after you move to Texas, you can terminate your foreign corporation registration with California. That'll stop the requirement to file California tax returns and of course you'll also stop paying California income taxes.

Which state should you incorporate in if you'll run a multistate operation?

If you operate a multiple state business, you have a trickier decision to make. But let me start by pointing out that you're not a multistate operation merely because you have customers or clients in multiple states. You become a multistate operation when you have employees in multiple states or when you own business property in multiple states or when you perform services in multiple states. Selling a product to some customer in another state where you don't have employees or property does not, in other words, turn you into a multiple state operation.

If you are a multiple state operation, you will need to incorporate in one of the states in which you operate and then register as a foreign corporation in any of the other states where you employ people, own property or perform services.

In this scenario, you probably either want to incorporate in the state where you've located the business or where the business's principal operations occur. One exception to this general rule, by the way, would be where the state of principal operations will change. In this case, you can use the rule mentioned in the preceding paragraph--the one about using the state you'll ultimately end up in as the state of incorporation.