Does the State Your Corporation is Filed In Matter?
Does the state of your corporation matter? Let’s talk about why it may or may not matter which state you register your corporation. Let's dive in!
Do State Laws Matter?
First off, you probably have heard that Delaware and Nevada have more favorable business laws. Oh, now it’s Texas, right? They have no income tax!
I'm here to say that none of that really matters.
I know, surprising. There was an old theory that the state you were incorporated in meant a lot because those state laws had such a different effect on your business. And we're not talking subtleties, right? These were significant. Maybe in one state, you could have a favorable court ruling for millions of dollars. In another state, there was no chance that could happen, given their history and the laws in that state. Now, this is not necessarily the case anymore.
So this is kind of breaking news.
It's actually not breaking news, because it's been around for quite a while. But a lot of states have adopted similar rules when it comes to governing corporations. That means that simply choosing a different state because of its laws is probably not the best approach. For instance, contract laws are pretty close in almost every state now. Again, that didn't used to be the case, but it is now. So that's something worth considering.
Where Do You Live and Where Do You Do Business?
Second piece of this analysis, what state do you live in and what state are you doing business in? This can be tricky. A lot of people are online now so I typically say–wherever you live, let's investigate that first. Now, there's a few hangups to that. If the state you live in has some kind of astronomical corporate tax, that may not be worth it for your type of business. And then you want to start looking outside your state, if applicable.
However, most of the time, if you live in a state or operate within that state, it is more advantageous to be a registered corporation in that state. Now, we're not talking about LLCs. We’re talking about corporations only right now. But in this corporation scenario, we want to ensure that you're making a decision that’s most favorable to you.
Let's say you have a corporation in Tennessee, and you live in Missouri. If you want to transact in Missouri, move your operations here, but you don't want to change your corporate status of being a Tennessee entity, you may have to register as a foreign business in Missouri. And sometimes that is just not favorable so consider that as well.
Shareholders
Also, what about shares? The “where” seems to be the gold star for shareholders, right? The reason why a lot of attorneys, despite all these things I’ve said, will register a business in Delaware or even Nevada, is because investors are typically more comfortable with these states. Now, this goes back to what I said before–the laws have changed– it’s not really as different as it was before. The advantages aren't substantial and sometimes the cost just outweighs your advantages. However, if you have investors who are seasoned, they have a checklist of what they're comfortable with. And since Delaware and Nevada, sometimes Texas, have been the gold standard for business law in their eyes, that's what they're comfortable with.
So typically, it makes sense to incorporate in these states so that when you're seeking investments, you're already in a state they're comfortable with. They understand how shares operate there and they understand the laws. There's a large level of comfortability and that can go a long way when you're asking someone to open their checkbook. They want to trust in that business. I have actually changed corporate structures from one state to another purely because an investor wasn't comfortable with that state. So yes, if you're seeking investment, it's probably best to be ahead of it and look at what states those investors have been in before and what their comparability is.
Now, if you're not going to seek investors, you probably just want to file your corporation in the state in which you live. Maybe you want shares because you want to give them to your family, or maybe there are local people who are going to work with you in exchange for shares (or whatever your structure may be). Generally, you are totally fine filing that corporation in whatever state you’re in.
Also Keep in Mind…
Here are a few other things to keep in mind when choosing which state to register your corporation.
Check what annual reporting is like in that state. As you're deciding on corporate status, what is in your reporting requirements?
How much does it cost to file that annual report? Some states, believe it or not, are completely free. Some will require hundreds of dollars each year.
Look at franchise tax. What is the franchise tax that's applicable to your type of business and how is that paid out? This can come in the terminology of a franchise tax, a corporate tax–we're not talking income tax–we're talking just on the entity itself.
Look and see if it's going to matter the type of business you do for transacting. What that means is, if you are in one state, and you're seeking, let's say government contracts in your state (like local contracts), there might be some kind of language where it's favorable that they only work with people who incorporate in their states. This also might apply if you have a professional license in your state, you might be required to incorporate in your state for that professional license. That's very industry specific but it's kind of the last prong in that analysis.
So you want to slow down your steps and consider all of these things before you pick a state. Now, if you have any questions about which state would be best to register your corporation in, reach out to us for help!
