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Choosing A State For Your Business Entity

Posted by Ryan M. Newburn | Feb 03, 2021 | 0 Comments

Choosing A State For Your Business Entity

When you start a business, you are bound by the laws of the state. Where you choose to incorporate your business has serious legal and tax consequences, so it is important to get it right from the beginning. Our experienced business attorneys at Newburn Law have worked with clients to set up businesses across the country, and we know the pros and cons of choosing a state for your business entity. Contact us at (303) 847-4987 to schedule a meeting with one of our experienced business attorneys. We want to learn more about your company to ensure we help you select the state that is right for your business.

Why Do I Need to Choose a State for My Business?

When a business incorporates, it forms an independent legal entity. The corporation's assets are managed separately from the owners', which is a preferable business arrangement for many medium- or high-risk businesses. However, to form a corporation, a business must choose a state to incorporate by filing articles of incorporation and paying a fee to that state's secretary of state. The state of incorporation does not necessarily need to be the state where the business primarily operates. Where the business chooses to incorporate has significant legal consequences, as the corporation is bound by the corporate laws of the state where it is incorporated. These laws are complex and far-reaching, ranging from corporate tax rates to how to run the annual shareholder meeting. Some states, like Delaware, are known for their corporate-friendly laws and taxes, whereas some businesses may find that incorporating out-of-state adds too much additional cost. 

Sole proprietorships and general partnerships do not need to incorporate, so choosing a state to incorporate is a more critical decision for business owners who want to form a corporation or limited liability company. Choosing the type of business entity is an equally critical decision, so be sure to speak with an experienced lawyer about the pros and cons of each type of business entity.

Should I Incorporate Where the Business Operates?

For many business owners, it makes sense to incorporate the company in the state where it operates. For example, if a business is located and operates entirely within one state, it may be the most logical and cost-effective choice to simply incorporate in the home state. However, depending on the type of business, it may make more sense to incorporate in a different state with more friendly corporate laws and taxes.

Incorporating your business out-of-state can be costly. The business must pay a fee to register in the other state, and then the business will also usually have to pay fees to each state in which it operates. For small businesses that primarily operate in one place, this additional out-of-state fee may not be worth the cost. However, in some cases, incorporating in a different state may provide tax benefits and other legal advantages that make the early filing burden more worthwhile.

Popular States to Incorporate

Some states are known for their business-friendly laws, which makes them more popular for corporations.

Delaware

Delaware is renowned for its pro-business laws. According to NPR, 60% of Fortune 500 companies are incorporated in Delaware, and 75% of IPO's come from businesses incorporated in Delaware. Some of the most commonly-cited advantages for businesses to incorporate in Delaware include:

  • Chancery Court dedicated to resolving corporate conflicts
  • No state income tax for businesses that operate outside of Delaware
  • Clear and modernized business laws
  • No residency requirements for shareholders, directors, or officers
  • Highest level of flexibility in choosing how to structure the corporation

Nevada

Businesses also often choose to incorporate in Nevada because of its business-friendly policies. Some of Nevada's advantages include:

  • No state income taxes, franchise taxes, or personal income taxes
  • Laws protecting against hostile corporate takeovers
  • Strong privacy laws protecting officers and shareholders
  • No residency requirement for directors

Registering in a pro-corporate state like Delaware or Nevada may make the most sense for companies that intend to operate in many states or outside of the country, but it may not be cost-effective for all small businesses. Nevada, for example, has relatively high filing fees, so unless a company makes enough profits for the tax advantages to be consequential, it may not be in your business's best interest to incorporate there.

Contact the attorneys at Newburn Law to discuss the advantages and disadvantages when choosing a state for your business entity.

Registering as a Foreign Entity

After the business is incorporated in your state of choice, it must be registered in each state where it operates. It is important to understand that registration is not the same as incorporation. Whereas incorporating a business means creating a separate legal entity based in a state, registration as a foreign entity typically only means informing the secretary of state that the business will be operating there. This may come with paperwork and fees, but it is usually a less arduous process than incorporation. The requirements to run a business in each state vary, but failure to register can cause serious penalties. In some states, this may mean a civil penalty or a refusal to recognize the legal entity.

Trust the Business Lawyers at Newburn Law

Our lawyers have helped clients form businesses in many states and countries. We know the advantages and disadvantages of choosing a state for your business entity, ranging from tax consequences to filing fees to privacy and residency requirements. Each business is unique, and we want to work with you to understand what your business needs. Contact us at (303) 847-4987 to schedule a meeting with one of our experienced business attorneys. Allow us to support your business in its early stages to ensure you are set up for success.

About the Author

Ryan M. Newburn

Ryan Newburn is a business and legal expert trusted by Executive Teams and Boards of Directors to apply sound business principals to solve legal and financial problems. Ryan's practice focuses on mergers and acquisitions, financings, corporate formations and corporate governance in a broad range of industries including energy, distribution services, healthcare, medical devices, and technology. Leveraging his formal business training and years of practical experience, including as an executive at public and private companies, Ryan has advised hundreds of companies in dozens of industries of unique legal and financial issues.

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