Where to Incorporate: Some Issues to Consider

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Updated on Monday, November 02, 2015

The internal affairs of a corporation are governed by the laws of the state in which it is formed. A corporation does not have to have an office or do business in the state in which it is incorporated; it need only have a registered agent in that state. There are companies such as CT Corporation System that will act as a registered agent in the state of incorporation.

Delaware

Delaware often is the preferred state of incorporation. Initially, Delaware gave management better rights in the event of a takeover, so in the 1940's and 1950's many corporations moved there. Delaware set up a court system that has expertise in commercial transactions and well-developed corporate law. Other states improved their corporate legal systems, but virtually every corporate attorney is familiar with Delaware law.

Delaware also has the Delaware Asset Protection Trust, which permits one to set up a trust that cannot be touched by creditors but that allows one to get one's money. Most other states require irrevocable trusts that prevent one from accessing one's money once it is in the trust. The state of Alaska responded with a similar trust, but added spouses and children to the list of creditors that could not get at the money in the trust. Delaware responded likewise.

Advantage of Incorporating in One's Own State

If the company does not plan to obtain venture capital funding, it may be best to incorporate in the state in which the company plans to do business. Doing so has the following advantages:

Local attorneys are familiar with the local law
One can have an intrastate securities law exemption.
There is the convenience of geographical proximity.
The corporation does not need to register as a "foreign" corporation in the state of operation if it is incorporated there.

Name Availability

The selected name must be available in the state of incorporation. In choosing a corporate name, one needs a name that can be used in every state in which the corporation will do business. It is best to coin a name that is not a common word in the language. "Exxon" and "Pentium" are examples of such words.

Issues to Consider when Selecting a State

Some of these issues may be important to your corporation. In any case, they can serve as a starting point for questions to ask.

How many incorporators are required by the state, and whether the incorporator itself can be a corporation.
The minimum number of people required to form the corporation.
The minimum capital requirement, if any.
The state's fees for filing the articles of incorporation.
The state's annual corporate franchise tax.
The state's corporate income tax and whether earnings from operations outside the state are taxable. The State of Delaware taxes non-Delaware resident shareholders of S corporations on their distributive share of S Corporation income based on the percentage of that income derived from Delaware sources. If a Delaware corporation has no Delaware source income, these taxes should not be an issue.
Whether the corporation is allowed to keep its books and records outside the state.
The state's court system's reputation of fairness in business cases.
Whether the corporation is allowed to have its principal place of business outside the state.
Whether there is a state inheritance tax on non-resident shareholders.
Disclosure/privacy - whether the state requires public disclosure of the names of shareholders.
Whether the state requires a corporate bank account in that state (Delaware does not).

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