The BizFilings blog covering business tips and trends.
What's the Best State to Incorporate?
Published on Nov 7, 2011
Read our article, 'What's the Best State to Incorporate?' at 'Time to Start Up,' the small business blog by BizFilings.
Savvy entrepreneurs and small business owners typically ask themselves which type of business formation is best for them. Often times, hours or even days of research can take place before a clear decision is made.But there’s another question that beckons attention — one that’s just as important:What’s the best state to incorporate?
Much like choosing your formation type, the best state for you to incorporate is contingent on the type of business you own.
In your search for a definitive answer, one of the first questions to ask yourself is whether you’ll be running an actual brick-and-mortar business, or a business that’s completely “virtual.”
Owning a Brick-and-mortar Business
If your business is a storefront, office or any physical location, incorporating in your own state is typically the best choice. This is true because if you were to form an LLC or corporation in another state — possibly because it’s cheaper, or you prefer its ongoing compliance requirements — you would still need to foreign qualify in your home state in order for you to enjoy all of the benefits of owning an LLC or corporation.
In other words, if you form in Delaware but are doing business in Alabama, you’d need to foreign qualify in Alabama if you want to maintain your limited liability protection there. If you don’t, you could be held personally responsible for your company’s debts and liabilities (including lawsuits). In addition, if you’re not incorporated in the state where you’re doing business, you may not be able to open a business bank account in your “home” state.
Owning a Virtual (Electronic Only) Business
A virtual business includes an online store (like Amazon.com) or simply providing services via internet, e-mail, phone or even fax.
In this case, you you may have more flexibility in where you incorporate. Many virtual business owners are under the assumption that forming a business in a state other than where they're located is the best choice — usually, as mentioned above, because it's cheaper or a particular state (like Delaware) is more "business friendly."
Before you decide, check the four contingencies below in the Foreign Qualification section to help you determine whether or not incorporating in another state is the best choice for your small business. One of the major reasons this is so important is that you want to ensure that your limited liability protection remains intact.
When I was a freelance copywriter, I had customers across the country that I did business with. All of the work I did was through e-mail and phone correspondence, but I still incorporated in New York.
Why? Because I had a home office, and although many of my customers were out of state, I was physically doing work in New York. Plus, I was paying myself, so I was an employee of the company.
You might be wondering what would happen if your virtual business grows so much that you start opening brick-and-mortar offices around the country? If this were the case, first of all congratulations — your business is growing! But since you want to continue to remain compliant and retain your limited liability protection, you’re going to need to foreign qualify in each state you are physically doing business.
What is Foreign Qualification?
Doing business in other states, known as Foreign Qualification, may sound like an international concept, but “foreign” doesn’t mean something outside of the United States. As mentioned above, it’s about operating domestically in the U.S., but outside of the state in which you originally incorporated your business.
When you Foreign Qualify in another state, you’re actually incorporating your business there. This means your company will be responsible for all the regular fees and compliances associated with that state.
Foreign Qualification is typically an excellent choice when you meet one or more of the following contingencies:
Your company has a physical presence in the state
Your company has employees in the state
Your company accepts orders in the state
Your company has a bank account in the state
Click here for more details on Foreign Qualification.
As you can see, there are some important points to consider when choosing the best state for your company to incorporate. The last thing you want to do is rush into a decision without clearly understanding all of your options. It might wind up costing you money and time down the road.
Please note that although this article offers an educated opinion on incorporation and Foreign Qualification, I strongly suggest speaking to your accountant or a lawyer to discuss what’s ultimately best for your company.