As a basic rule of thumb, you should always organize your business under the laws of the state where all or most of the business activities will occur. You can also generally organize where one or more of the owners reside. But what if you operate an Internet-based business, which really operates in several states? Is there a better choice for multi-state businesses? You may be wondering if states such as Nevada or Delaware really the best place to organize an Internet or business with a national presence. After all, these two states receive a ton of hype from numerous incorporation and asset protection websites.
Generally, it is more cost effective and logical to organize in the state where you will conduct the majority of your business, or where you are physically located. There aren’t too many compelling reasons to form in another state. Doing business in other states and registering as foreign entities, franchise and corporate taxes, charging order protection, rights of creditors and liability of the owners are fundamental topics you should understand. Each of these topics should be considered in detail.
As a quick summary, here is a basic laundry list of factors that you can consider other than the physical location or state where most business will occur:
- the comparative costs of the filing fees in a particular state and the costs of registering to do business as a foreign corporation or LLC in that state;
- the business income tax structure and tax rates of the given state(s);
- state franchise taxes;
- privacy concerns;
- the laws of the state regarding the rights of creditors and beneficial owners, including charging order protections;
- the laws of the state with regard to the rights, responsibilities and fiduciary duties of corporate shareholders, officers, directors or members/managers of an LLC;
- liabilities of directors, officers and managers of an LLC;
- Other business related laws such as corporate ownership of stock, contribution of services for stock and personal liability of the owners.
In the coming posts, I will attempt to review the significance of most of these factors so you don’t make a mistake that may end up costing you money you could have saved. Perhaps, in understanding all the different factors, you may decide that it is worth it to organize away from you “home state”.