1. Incorporating in Another State
2. Facts to Consider Before Incorporation

Can I incorporate my business in another state? If you've ever asked this question, then you will be happy to know that the answer is yes, it is possible to incorporate your business in a state other than your home state. In fact, incorporating in another state can be very beneficial if your home state does not have business-friendly laws.

Incorporating in Another State

Saving money on formation costs is the main reason that business owners choose to incorporate in another state. Businesses in California, for instance, have to pay an $800 annual franchise tax regardless of how much they earn or their size. This tax has led many businesses to incorporate in Nevada, which has a much more business-friendly climate.

Delaware is the most popular state in which to incorporate for a variety of reasons. For example, in Delaware, legal cases involving corporations are heard in the Court of Chancery, which is known for issuing fast decisions. Because of its corporate-friendly climate, Delaware has more corporations than any state in the country.

Some businesses choose to incorporate in a certain state based on disclosure laws or lack thereof. Certain states have become very popular incorporation options because they don't require a corporation's owners to publicly reveal their personal information. Such states include:

  • New Mexico
  • Nevada
  • Wyoming

Even though Delaware is already the most popular state in which to incorporate a business, some corporations must incorporate in this state. For example, investors in a company may require that the company incorporate in Delaware before they will lend any of their money.

Facts to Consider Before Incorporation

An issue that many business owners overlook when incorporating in another state is the fact that they may end up having to pay taxes in two states: the home state and the state where the business is incorporated.

States can charge numerous fees and taxes to businesses that incorporate within their borders, including:

  • Annual report fees.
  • Corporate tax.
  • Franchise tax.

You should be aware that you will likely need to pay taxes in any state where your state has a physical presence or financial nexus. Having a physical presence in a state should be easy to understand. For example, if you have employees or an office in a state, you are maintaining a physical presence. A financial nexus basically means that you are generating income in a state.

If you form your business in one state but the bulk of your income is generated in another, you will likely get taxed in both states. In addition to forcing you to pay taxes in two states, doing business in one state while incorporating in another also requires complying with two different sets of laws.

If you want to incorporate your business in one state and operate in a second state, you will need to register your company in both locations. In the state of incorporation, you would complete a domestic entity registration, and in the state where you do business, you need to complete a foreign entity registration.

Complying with laws in two states can be very complicated, requiring you to pay attention to multiple issues, like:

  • The taxes due in each state.
  • Filing an annual report in both states.
  • Hiring two registered agents.

If you fail to comply with the laws in each state, you may incur expensive fines and can even lose your ability to conduct business in one or both locations. Before you incorporate in another state, you should keep in mind that only certain business entities will benefit from out-of-state incorporation. The laws in Delaware, for example, are most beneficial to large corporations that frequently must defend themselves against lawsuits.

If you've completed incorporation in another state and later come to regret the decision, you can fix your problem very quickly. With the domestication process, you can relocate your business to your home state relatively easily. Only certain states, however, allow for domestication.

Before you begin the domestication process, you should be aware that relocating your business requires several steps. You will need to file documents in each state where your business is registered, and you must dissolve your business in the state where you incorporated. If you're not careful about completing the domestication process, your business may be dissolved before it has been reestablished in your home state.

If you need help incorporating your business in another state, you can post your legal needs on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.