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How to Incorporate a Business in Another State

Is a foreign qualification right for your business?

Deborah Sweeney, CEO of MyCorporation


Some states offer incentives for business owners to incorporate within their borders, such as Delaware or Nevada. While you may be tempted to choose one of these states as a home for your business due to tax benefits, in many cases the extra fees and paperwork won't be worth the hassle. Let's explore the process of incorporating in another state to help you decide if this is the right choice for you.

Incorporating in another state

The process of setting up a business varies from state to state, however there is no rule that you must form a business in the state you live in. In fact, no state requires that a business owner live in the state where the business is incorporated. That said, every state requires that you maintain a registered agent (address within the state) to receive legal notifications and communications from the state. You can use a third party registered agent service for this which will come with some costs, but usually only a few hundred dollars a year. The second thing to keep in mind is that if you form your business in another state, but plan on operating in your home state, you will need to foreign qualify, and pay the required taxes in your state anyway. So if you planned on forming a business in a business friendly state just to avoid taxes, you might be pretty disappointed next April. But, if you are forming a multi-state business, it is wise to choose the most business friendly state to form your business, and foreign qualify in the others.

Where should you incorporate your business?

If you have a physical business, as in an office space or building with employees, and your customers primarily come from the community you are located, then you are probably going to want to simply incorporate in your home state. Whenever a company does business within a single state, it has to register with the state government, which means paying the necessary taxes and filling out paperwork. Of course, if it is worth it, you can incorporate in another state and register as a foreign company in your home state. It really is all a matter of determining how much money and time you stand to save, and if it is worth the extra effort.

Remember that you will have to pay fees to conduct business as a foreign entity, so if your business is smaller, it could end up costing you quite a bit of money. The Internal Revenue Service also looks to where you do business, not where you are incorporated, and if they feel you are trying to avoid taxes, you could be hit with tax penalties. But a neat part of incorporating is that you are creating a legal entity entirely separate from yourself. So that entity can move and live wherever it wants depending on what is best for it.

Typically, online businesses choose to incorporate in states that are deemed as "Tax Havens;" Incorporating in Nevada or forming a business in Delaware are the two most commonly chosen solutions. This is because online businesses do not do business in just one area, and often try to sell to customers in a variety of states. Interstate taxation is limited, which is good for your customers, but all of the taxes associated with a corporation still have to be paid at the rate established by the state in which the company was incorporated within. So incorporating in a state where these taxes are low, or non-existent, makes quite a bite of sense as it saves you money, which is always a good thing. Determine who your target consumer is, and if you will be selling your product to people outside of your incorporation state. Whatever your eventual choice, be sure to do your research and consider all of your options. You will need to have either a physical presence or a registered agent in whichever state you choose to incorporate within, and should also be aware of any expenses or fees you will have to pay. Be sure to visit the state's website, and look around the secretary of state's page; it will help you in becoming familiar with all of the requirements and laws applicable to businesses operating in that state's borders. An online incorporation service can also be a big help in this process, as the requirements and paperwork can become complicated or confusing. The best course of action is always to consult with a professional, like an accountant or attorney, and seek recommendations from them as well.

Can you incorporate in multiple states?

Technically, you incorporate a business in a single state, but can register to operate your business in additional states by filing a foreign qualification. This basically allows you to register your business in any other state you plan on conducting business. Conducting business without filing a foreign qualification could mean you could be charged fines and fees and be held liable for back taxes.

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