Incorporation has various benefits over general partnerships and sole proprietorships, such as limited liability protection, tax advantages, credibility in the eyes of customers and partners, unlimited life span, and retirement benefits such as 401(k). So, assuming that you have decided to incorporate your establishment, then comes to this very question – which state to choose?
Should it be the state where your business operates physically or a new state altogether, given the fact that the law permits one to do so freely in any of the 49 remaining states?
Well, the final decision in choosing the right state depends on many factors, but most importantly it rests on three of them. First, it is the location of the business – the location of existence of business facilities – followed by the cost factor – between incorporating in its original location and doing the business as a foreign corporation in a different state – and the intricacies (advantages and disadvantages) of the corporate laws and tax structure and other factors of different states. Since it is legally possible to incorporate in any of the 50 states in US, from an owner point of view, the puzzle is all about weighing the pros and cons of the different states before choosing the right one for his/her business.
Elaborating more on the above mentioned points, if a corporation’s market horizons extend only up to the borders of its own state of existence, then it is better to locally incorporate it in that state itself. The total cost of local incorporation will be very much lesser when compared to incorporation as a foreign corporation in a different state. Incorporating on a different state, on the other hand, appears a good choice if the business interests of the corporation extend very well beyond the contours of its physical existence. But, here it must be kept in mind that while incorporating in a different state as a foreign corporation, it simultaneously binds the business to pay the taxes mandated by the state laws alongside the annual report fees of both the qualifying and foreign states. Such a choice would be a bad call altogether if the corporation is on the fringes, and is a not so profit making firm.
Finally, in terms of corporate laws and other formalities, it would be better to choose a state which offers liability protection, protection to owners/shareholders, and has other corporate friendly laws such as no need for re-incorporating when the company goes public or receive funding from venture capitalists. Having an efficient court system to handle highly complex legal litigations is also a prerequisite in selecting a state for incorporation.
Summing it up, all the above mentioned factors, Delaware and Nevada tops the list of most favorable states where one can safely incorporate their businesses. In fact, Delaware leads the race, which is substantiated by the fact that it has most number of large corporations – Nasdaq and Fortune 500 – and foreign corporations existing within its boundaries. Nevada is quickly catching up and is on the upward spiral of late.