Choosing a State to Incorporate Your Small Business

For legal reasons, if you have a small business, you should probably incorporate. But where should you incorporate your business?

Choosing the right state to incorporate your small business can be one of the biggest decisions you will ever make. There are basically two options: incorporating your small business in your home state, (the state where it is located and where it operates); or incorporating in another state. You are not required to incorporate your business in the state where you operate, and you are perfectly free to choose a different state.

Unless you live in one of the states that have no corporate income tax on profits, no state annual franchise tax, no annual personal income tax, and have more protection and flexibility like Delaware, Nevada or Wyoming, it might be worthwhile to consider incorporating your small business out of state.

However, there are distinct advantages to choosing to incorporate your small business in your home state.

Building a Local Presence

You obviously have a local presence in your home state, the state where you operate and do business. If you want to incorporate out of state, you have to build a local presence and find someone in that state willing to act as your legal representative. Although you can hire a registered agent to represent your company, these agents often charge substantial fees, usually represent hundreds of other corporations, and may not have the time and attention to look after your interests.

There are often special taxes and franchise fees associated with incorporating your small business out of state, and they can be confusing. Although some states have tax laws that are advantageous to businesses, you might lose home state advantage by having to operate as a foreign corporation - which may include extra yearly franchise fees and additional income taxes.

In addition, incorporating in a different state may become a downright nuisance if you are ever sued. You would then need to hire an attorney from, as well as defend yourself and your small business in the state of incorporation. This may result in additional expenses, such as travel time for court appearances.

When you're choosing a state to incorporate your small business, get advice from a CPA or tax attorney before you make a final decision.