State of Incorporation: Everything You Need to Know
The status of a corporation refers to the state where the company was registered.4 min read
2. Other Questions to Ponder
3. Check Available Names
4. Filing Requirements
5. Tax Filing
6. Preferred States for Incorporation
The state of incorporation refers to the state where the company was registered. For instance, a corporation registered in Delaware will be designated as a Delaware Corporation, and its state of incorporation will be Delaware. Further, the state of incorporation means a corporation is under a certain classification with the IRS. Moreover, the IRS designates corporations as either S or C corporations.
States categorize incorporated businesses under two categories: active and inactive. Corporations are also governed by unique corporate laws of each state. Delaware is a traditional haven for corporate registration due to the state's lucrative tax codes and corporate-friendly laws.
How to Select a State for Incorporation
You have two options when choosing a location for your incorporation: registering in the state where you conduct business or registering in another state. Incorporating your business in another state is a cheaper process. Out-of-state incorporation has its own set of benefits, but the cost is more expensive. Since each state has its own corporate laws, you must decide which location is best for your business.
You must factor in your goals and budget capacity before deciding on the best location. For instance, local businesses that primarily remain in one state should register in a single state.
Incorporation in your own state can yield the following benefits:
- Local Consultation: Local attorneys are more likely to help because they are familiar with local laws.
- Geographical Convenience: You are more familiar with your local surroundings than conducting business in another state.
- No Foreign Status Registration: Registering as a foreign entity will come with additional taxes and fees.
Corporations that do business in other states need to file in multiple states. It is worth noting that the states with the lowest corporate income tax rates may not necessarily be the best options for your business. You must consider a wide array of factors, such as:
- Flexible corporate laws
- Market share
- Operational costs
Other Questions to Ponder
- Number of incorporators: Some states require multiple registrations while others need only a sole incorporator.
- Minimum owners: Certain states may require a certain number of people to establish the business.
- Minimum investment: You may face minimum capital requirements necessary to open the corporation.
- Fees: States have various fees, some are more expensive than others.
- Tax structure: You must investigate such matters as an annual corporate franchise tax. In addition, earnings from outside of the state may be taxable. You also need to be concerned about inheritance taxes levied on shareholders who are not residents.
- Record-keeping: Some states restrict record-keeping beyond state borders.
- Privacy laws: Other states may require the public disclosure of shareholders.
- Corporate bank account: A state may mandate a corporate bank account, but Delaware is one state where such a law does not exist.
- Foreign status: State corporate laws may restrict primary places beyond the state.
You may find that a state's corporate laws create an unstable atmosphere for your business. Regardless of the state, a corporation does not need a physical office to gain registration approval, but registration within the state is mandatory. In all cases, corporations need a registered agent. A registered agent is an appointed representative who receives official documents and submits annual reports on behalf of the company. Individuals of a corporation or entities can act as a registered agent. Moreover, there are separate companies that will act as registered agents on behalf of a corporation.
Check Available Names
The selected name must be available in the state of incorporation. Conduct research to confirm your intended name is not in use. Further, choose a corporate name that registers in each state where you intend to do business. When naming your company, avoid common words or wording that confuses your brand with another company or government agency.
Corporate laws mandate that corporations submit regular documents to maintain legal status. For instance, annual reports are one regular filing requirement necessary to remain legal. Failure to submit annual reports in a timely manner could result in suspension, revocation of a corporation's registration or could be placed in inactive status. With that, inactive status is usually reserved for corporations that undergo a heavy change. Such a large change could mean a variation in the company's name.
The IRS grants corporations with an immediate “C” status upon creation, regardless of incorporation.
Shareholders can enter “S” status through the filing of Form 2553 with the IRS and the satisfaction of other federal requirements. S corporations allow profits to flow from the entity to individual shareholders, where profits and other deductions can be claimed on personal tax returns. S-status is also a great way to avoid double taxation that may come with C corporations. However, some states may not recognize S corporation tax privileges.
Preferred States for Incorporation
Delaware and Nevada are two of the most favorable states for businesses. Delaware boasts an extensive body of corporate law and low state taxes. Its business laws are among the nation's most flexible. It also has a dedicated court system for commercial transactions and the Delaware Asset Protection Trust, which is used to protect personal assets from creditors.
Nevada is favorable because it does not charge fees on corporate shares and has no state income tax, franchise tax, or personal income tax for corporations. Officers, directors, managers and members do not need to live in Nevada.
To learn more about state of incorporation, you can post your legal need on our marketplace. UpCounsel will help in any area pertaining to incorporation, including any questions you have about business structure and the right one for you. Our esteemed lawyers are willing to guide you on a path to success as you determine the best course of action for your business endeavors.