Incorporation 101: Where Should I Incorporate?

Choosing The Right Incorporation State

Once you have decided to incorporate or organize your business as an LLC, you need to choose the state to your new legal entity.

Naturally, for most business the choice would fall on their home state, i.e. the state where the company will do most of its business. This rule holds especially true for smaller businesses that will likely not expand significantly, or that do not want to conduct business outside of their home state, like shops, dealerships, etc.

As your business grows, and it appears that you may need to conduct business in another state, you can always register what is called a "Foreign Entity", or a "Foreign Corporation" - technically, a legal "extension" of your business in another state.

Not all businesses necessarily need to be organized in the state where you are currently located (especially if you are a foreigner and live outside of USA). Each state has its own legal requirements and registration procedures for new businesses wishing to incorporate. Certain states are famous as favorable homes for incorporating or forming an LLC due to their unique incorporation laws and favorable tax policies. The most notable are Delaware, Nevada, and Wyoming.

Some Examples:

• If you are looking to place your real estate assets under a legal entity like corporation, then it makes sense to incorporate in the state where those assets are physically located.

   With that being said, you might have several real estate investments in many different states. In that case it might be wise to incorporate your business in one of the more favorable states, and then just form Foreign Entities in other states where you have your real estate assets.

• For those entrepreneurs looking to form a corporation or LLC for their new ventures (like online businesses, or technology start-ups), choosing one of the more favorable states (like DE, NV, or WY) might prove to be a wiser choice. That is especially true if some or all shareholders and/or employees are not located in the same state, like its often a case with Internet-based businesses.

• Home-based businesses would often enjoy many tax benefits related to maintaining an office in your home, therefore, with some exceptions, it would usually make sense to organize your home-based business in your home state.

• Some specific needs require specific choices as far as organization goes. An example of such specific need would be estate planning. If you are looking for ways to protect your children and spouse from enormous estate tax liability when you go to a better place, there are incorporation tools offered by various states (such as "Close Corporations", "Close LLCs", etc).

• Other examples include some more exotic types of entites like L3C - Low-profit LLC, a cross between a nonprofit organization and a for-profit corporation. The entity is designated as low-profit with charitable or educational goals, and is currently being offered only in few states.

 

To fully evaluate your incorporation needs and to choose the right place where to form your business entity it is important to consult your CPA or attorney. Those specialists should have the knowledge and experience to help you evaluate your unique business needs and help you make the best choice.