Choosing the State in which to Form Your Business
Where should you form your entity? Does Delaware or Nevada hold some magical power that makes those jurisdictions magnets for many corporate formations? The quick answer is no.
Historically, Delaware had favorable corporate laws and a court system set up specifically to deal with corporate disputes. However, most states have caught up substantially with Delaware and have enacted modern corporation law. Nevada's appeal is the lack of corporate tax, and it may— depending on how you set up your company—provide some measure of anonymity for the founders.
However, the best advice is usually to form your entity in the state where you intend to do business. Eventually, if you are doing business in your home state, your friendly tax authorities will come knocking on your door. It is entirely permissible to incorporate in a state different from your home state, but you must qualify your out-of-state (foreign) corporation to do business in your home state. The concept of doing business for tax and registration purposes is a vast topic. As a rule of thumb, if a corporation has a
fixed place of business, a telephone number, a business license, etc., in a state that is different from the one in which it is registered, then it is doing business in that state. In this situation, the company needs to register and qualify as a foreign corporation.
If you form your entity where you intend to do business, you will find it is easier to deal with one bureaucracy as opposed to two and just pay the taxes for one state. Most states require you to register an out-of-state entity with your state and pay additional fees if business is done there.
Staying Focused: In the first few months, as your operations are ramped up, and research and development are conducted on your products or services, you will probably be losing money. Worry about forming multiple companies in multiple states later. For now, keep it straightforward. There are too many other things to worry about—like growing the company.
