What is the best choice?

One of the first decisions a business must make is which state of incorporation to select. It is not required to incorporate in the state where your business operates; you can choose from any one of the 50 states or the District of Columbia.

In making the decision of where to incorporate, three factors typically are considered: the location of physical facilities, a cost analysis comparing incorporating in the state of operation versus qualifying to do business as a foreign corporation in the state in question, and determining the advantages and disadvantages of each state's corporate laws and tax structure.

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.

For legal advice concerning the state of incorporation, please consult an attorney with a business law background.