Once you’ve decided on your business structure your next decision is to decide where you will incorporate or organize your company.
Now, if you’ve done any research at all on forming an LLC or corporation, you likely have encountered ads encouraging you to form your company in Delaware, Nevada, or Wyoming. They argue that these states offer advantages above and beyond what the state where your business is located offer. While it is sometimes true that these states do have a few unique benefits you really need to consider whether or not these benefits are truly desirable or even apply to your particular circumstances.
So let’s talk about the mechanics of forming and operating a business and how this impacts your decision on where to form your LLC or corporation.
The first thing to note is that regardless of where you form your company, if you conduct business in another state you’ll be obligated to register in that state. This means that you’ll have to pay taxes and file reports in every state in which you conduct business, just as if you actually formed your company there.
The state where you form your company is referred to as your home state, and in that state you are considered a domestic entity. You’ll be obligated to follow your home states laws and regulations, pay taxes or fees, and file reports.
If your company then conducts business in other states, it will need to register as a “foreign” entity in each state that it transacts business. Foreign registration enables your company to transact business in a state other than the state where you initially formed it.
To foreign qualify, a Certificate of Authority must be completed and filed and additional state filing fees paid. Foreign qualified businesses are subject to ongoing requirements and fees both in the state of initial formation as well as every other state in which it is foreign qualified.
What constitutes transacting business varies by state, but the most common considerations include whether the company has a physical presence, employees, or bank account in the state and if and how often you meet clients in the state.
You can form your LLC or corporation in any state. However, in general, most small businesses should form their business in the state where the company is physically located and where most of its revenues are derived. While there might be some exceptions to this general rule, the fact is that if you are operating a local business that serves customers that mainly live in the state where your business is located you might as well form your LLC or corporation in the state where you live and keep things simple. Do you really need the extra fees, taxes, and compliance headaches?
So when you’re trying to determine where you want to form your new company you should take into account the following:
- Where you’ll derive most of your revenue
- How many states you’ll be doing business in
- State filing fees, both domestic and foreign
- Post-formation and ongoing compliance requirements
- Annual report and franchise tax fees
- Registered agent fees
- State law and taxation requirements