Where to Incorporate

How do you decide where to incorporate? Well, as a practical matter, most businesses will incorporate in their home state, the place where they do most of their business, where they’re headquartered, or domiciled. This is especially true for small businesses that have a more local or regional focus. The choice is driven largely by convenience.

What about incorporating in a state that’s not your home state? Many large publicly traded corporations are particularly fond of Delaware as a place of incorporation, and you might be wondering whether you should be too. In their eyes, Delaware represents a business friendly climate that includes a relatively low cost of incorporation, and a mature body of corporate law that comes in handy if you expect to be sued or anticipate corporate governance issues, among other things.

As a small business you too can certainly take advantage of Delaware’s business-friendly climate. But if you do that, and are merely using Delaware as your home away from home, you still have to register to do business in your home state as a “foreign corporation.” In this context “foreign” does not necessarily mean international. Any corporation that’s incorporated in a state other than the one where they want to operate is defined as a foreign corporation.

For many small businesses, the time and expense necessary to make the additional filing outweighs the “benefit,” particularly since more states are adopting business-friendly laws of their own. On the other hand, if your future plans include going public, or you’re teeing up your business as a future buy-out target so you can buy an island and retire in the sun, it may be a different story. Consult your attorney.

Even if you don’t have a glamorous exit strategy, it’s smart to keep the “doing business as a foreign corporation” concept on your radar screen, because as your business grows and becomes more successful, you may find your activities spilling across state lines and trigger a filing requirement. The expansion could be a new franchise location, for example, or a regional sales office located closer to your expanding customer base.

Whenever you “do business” in another state, you’ll want to consult that state’s “doing business” regulations because each state has a slightly different definition of what constitutes “doing business.” Some require a high degree of business presence and activity. Other states have a lower threshold. It pays to check.

While deciding where to incorporate is a major step in the incorporation process, it is not an irreversible step. You can always change your state of incorporation the same way you can change your form of business organization. If you do find yourself wanting to make such a change at a later date, it is highly recommended that you consult with an accountant and an attorney who is experienced in such matters. That way you can avoid unnecessary tax consequences and complications. You’ll want to be sure that all of the appropriate legal steps are taken for a smooth and seamless transition.