Incorporating in Different State (Your Home State vs. Another State)

Where to Incorporate

One of the first considerations for business owners after starting a new business is deciding where to incorporate.

If you’re thinking of incorporating in a different state than your home state, you should think twice…

You should incorporate your business (LLC or Corporation) in the state in which you’re doing business. 

For example, if you’ll be operating your business in California, then you should form your LLC in California.

However, if you’re not planning to have physical presence in the US (meaning that you’ll operate solely from outside the US), then you should form your LLC in Wyoming, the best and most foreigner-friendly state for non-US residents.

If you choose to form your LLC in any other state outside of the state where you currently have physical presence or where you will be conducting business, then we would also have to register your LLC in your own home state as well.

This is because you need to let your home state know that are you operating a “foreign” LLC in their state, and as a consequence, you would be responsible to pay filing fees and annual fees in BOTH states — which you do NOT what to do.

So the answer really is: your should form your LLC in the state where you’re actually doing business (this also applies if you’re operating an online business).

If you have any questions about where you should incorporate or if you’d like to incorporate your business, email me at sam@mollaeilaw.com

 

Incorporating in Your Home State

A standard rule of thumb is to incorporate in the state where the LLC or Corporation will do most of its business.

This holds especially true for smaller businesses that will likely not expand significantly, or that do not foresee conducting business outside of their home state.

So forming a business in your home state is usually the safest bet for a small business.

Forming an LLC or Corporation in the state where your business is physically located is called a “home state” incorporation.

The key thing to know is that you must be registered to do business in the state where your business is located.

If you incorporate in the same state where your business is located, then this is automatic.

If you incorporate in a different state, you will have to register your company to do business in the state where your business is located.

In making the decision of where to incorporate, there are two primary factors to weigh: your budget and your goals.

The decision typically is between incorporating in the state of operations and incorporating in Delaware and registering the company in the state or states where the company will be doing business.

If the corporation is a closely held company that does business primarily within a single state, local incorporation is typically the best decision.

The cost of local incorporation will usually be less than incorporating in another state and qualifying to do business as a foreign company in that state.

A foreign company that qualifies to do business in another state is subject to taxes and annual report fees from both the state of incorporation and the qualifying state.

Thus, the actual advantage of incorporating in a state with very low or no corporate income tax is not as great as it appears, if your business must still qualify to do business in its state of operations.

 

Incorporating in a Different State

If you’re not ready to take your company public immediately, you should file in your home state.

Forget about Delaware and Nevada and Wyoming.

You can always move your LLC from your home state to Delaware down the road and convert it to a C-Corp if you’re selling shares.

For now, file in your home state and avoid the fees associated with filing in another state, and then having to file as a Foreign LLC in your home state, which will be required.

Most non-residents file in Wyoming or Delaware. I suspect this is because of the hype about the benefits of filing in these states, and either of these states will work.

Two things to consider:

  1. The annual fees (Delaware is a minimum of $300, Wyoming is a minimum of $50), and
  2. Where you might create your virtual office for SEO purposes.

 

If you are running a business that is targeting surfers, and you file in Wyoming, you might end up getting a virtual office in your home state and be forced into filing for Foreign LLC status, and have to pay double fees.

 

What’s Considered “Doing Business?”

Typically, you’re considered to be conducting business activities in a state when:

  • Your business has a physical presence in the state
  • You often have in-person meetings with clients in the state
  • A significant portion of your company’s revenue comes from the state
  • Any of your employees work in the state

 

Incorporating in Different State

If the company is incorporated in another state but conducts business primarily in the home state, it may need to “foreign qualify.”

For example, if a registered Texas corporation wishes to become authorized to do business in California, it will likely need to obtain a Certificate of Authority for Foreign Corporation from the California Secretary of State. Most states require that out-of-state corporations pay a filing fee in order to register as a foreign corporation.

Foreign qualification registers a corporation or LLC to transact business in a state other than the state of incorporation. To foreign qualify, the proper paperwork, called a Certificate of Authority, must be completed and filed and additional state filing fees paid.

Foreign qualified businesses are subject to ongoing requirements and fees both in the state of incorporation and also the states of qualification.

 

Why Some Businesses Incorporate in Delaware or Wyoming

Many large public corporations choose to incorporate their businesses in the state of Delaware.

This is because, traditionally, Delaware’s corporation laws are seemed to be  friendly to business as related to corporation codes, lost cost of incorporation, lenient disclosure requirements and friendly income tax laws for corporations operating in the state.

 

Conclusion

Deciding where to incorporate and starting the incorporation of your business are important steps in the success of your business.

To ensure that your business complies with legal requirements in the state you wish to incorporate, you should email me at sam@mollaeilaw.com if you have any questions about where you should incorporate your business.

If you’re looking to start your LLC or don’t know where to incorporate your business, email me at sam@mollaeilaw.com