Who Should Incorporate Their Small Business Out of State?

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Author: Jacob Wren

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Nevada has no corporate income tax on profits, no state annual franchise tax and no annual personal income tax. Delaware offers so much protection and flexibility that most of the companies listed on the NYSE are incorporated there. Despite all the reasons giant corporations are typically located out of state it might be advantageous for your small business to incorporate in its home state. Here's why:

Reasons to incorporate your small business out of state

So you've decided to incorporate your small business and protect your personal assets. Unless you live in Delaware, Nevada or Wyoming, you're probably considering incorporating out of state. Nevada has no corporate income tax on profits, no state annual franchise tax and no annual personal income tax. Delaware offers so much protection and flexibility that most of the companies listed on the NYSE are incorporated there. Despite all the reasons giant corporations are typically located out of state it might be advantageous for your small business to incorporate in its home state. Here's why.

Hassles and expenses of incorporating out of state

You must have a local presence in the state you incorporate in. So unless you've got a cousin in Nevada that's willing to act as a legal representative for your business, you're out of luck. Of course there is the option of hiring a registered agent to act as representative for your corporation. Registered agent charge reasonable fees, but they often represent hundreds of other out-of-state corporations. Do you really want that person making legal decisions if you're unavailable, or would you rather pay an expensive corporate attorney?

Taxes and franchise fees associated with incorporating out of state

This can get a bit tricky. Although some states, like Nevada, have advantageous tax laws, it might not be to your advantage to operate in your home state as a "foreign corporation". Many states require corporations that are registered out of state to register as a foreign corporation. This registration is required to do business and may also include yearly franchise fees and income taxes.

What if you get sued?

Incorporating may protect your personal assets but that doesn't mean that someone can't sue your corporation. To compound matters it may be necessary to hire an attorney and defend your self in your state of incorporation. Law suits in themselves are a real hassle. Imagine having to travel across the country each time you were required to appear in court.

Well, what's it going to be then, eh?

Unfortunately the decision to incorporate out of state is not as simple as choosing the type font for your letterhead. There are several different factors to influence your decision. The most important of which are your state of operation's tax laws and the size of your business. This is definitely not a decision that should be left to one person. Speak with as many qualified CPAs, attorneys and most importantly business owners who've been in a similar position before making a decision that could be very costly indeed.

Jacob Wren operates small business assistance - a resource site for entrepreneurs that offers advice on incorporating small businesses and an array of other topics.