In Which State Should You Organize Your Business?

In Which State Should You Organize Your Business?

Companies which own or lease real estate, employ people, conduct business and/or generate income in a state are considered to be “doing business” in that state. A small business that is “doing business” in only one state should, in most cases, organize in that state. If, however, you are contemplating doing business in more than one state, the decision about where to organize your business gains importance.

For one thing, you will have to “qualify” in any states where you will be doing business, and “qualifying” can be as costly as organizing an entity. In addition, you will be paying annual franchise taxes in the state where you originally filed as well as in the state in which you qualified.  You will most likely also have to pay annual registered agent fees in the foreign state for the life of the entity. In addition, if you do not file in the state in which you are doing business, you may be denied access to the courts and be subject to further fees and penalties.

Meanwhile, the laws that govern entities (corporations and LLC’s) and taxation vary from state to state. If you will be doing business in multiple states or will eventually consider seeking public financing, the choice of the original state of organization may have significant financial and legal consequences. It can be financially advantageous, especially for large companies, to organize in states that have business-friendly fees and taxes as well as laws favorable to entities.

Delaware is the most notable of these states. In Delaware, there is a franchise tax, but no corporate income tax and no personal income tax for non-residents. The courts, laws, and policies are generally considered beneficial for business. The Delaware Court of Chancery focuses solely on business law. Cases are decided by judges who specialize in business law and have developed a body of legal precedents that simplify the resolution of issues. Disputes tend to be resolved quickly without juries. There are no residence requirements for corporate shareholders, directors and officers, or LLC members and managers. Shares or membership interests held by nonresidents are not subject to Delaware taxes.

BlumbergExcelsior Corporate Services will gladly assist you in comparing the advantages and disadvantages in selecting the appropriate state in which to organize your business.