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Corporation or LLC - What State is Right for Your Entity?

Everyone planning to set up a new corporation or LLC faces the question of what state should they form the entity in. You read on the Internet or see ads on television about the "wonders" of incorporating in some particular state. The half of the truth that the proponents generally don't tell you is what can later bite you.

The general rule is that your corporation or LLC has to be registered in the state where your primary place of business is. If you form your corporation in Delaware, you are required to register it as a "foreign corporation" in the state where you are primarily doing business. In most cases, if you form your entity in another state, you face twice the cost of setting up the entity and twice the number of state forms to deal with.

For a huge national or international publicly traded company that wants to limit shareholder rights or protect itself from a perceived risk of a hostile takeover, the choice of where to form and "home base" the entity is an important and sometimes complex decision. If that is your situation, you need to spend a lot of resources on that question because it can have large consequences.

If, on the other hand, your business is essentially local, your choice is generally quite simple. If your computers, telephone numbers and employees are all in one state, that will generally be the state where you want to form your entity. Even if you have customers all over the world because of the Internet, what matters for purposes of "home basing" your business entity is where the business answers its telephones and sends and receives emails.

If, on the other hand, you expect to have a physical presence in multiple states (even adjacent states), you will need to consult with an experienced small business attorney and with your accountant to determine the best place to organize the entity and whether you need to register the entity in the other state(s). Some good advice at the beginning can save you a lot of time and expense later.

Like every general rule, the general rule favoring the state where your business has is principal physical presence has exceptions. Neither this blog nor any other general resource (like Internet based resources) can tell you whether your business comes within some exception and how to address that issue to accomplish your business goals. Your best place to start to get a clear answer to the question of where to form your new business entity is by consulting with an experienced small business attorney.

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