Business incorporation often comes with a lot of administrative duties, among them strict record keeping. But the good thing is, it comes with lots of benefits for companies that go this route. Once incorporated, your business will be seen as a stand-alone entity, both tax-wise and liability wise. This means that you, as the business owner will not be held liable for any debt that it accrues with time.
Additionally, incorporation also showcases your business as a professional one which improves the chances of grabbing the attention of investors. Fortunately, incorporation is a wide field, and there are a lot of ways to tweak it to your advantage, including incorporating your business in another state other than your home state.
Here’s what to keep in mind:
The Benefits of Incorporating Your Business In Another State
Taxes vary from state to state, and it might make more sense to incorporate wherever state tax laws play in your favor as a business. Additionally, some states have well-established business laws and corporate courts that help deal with conflicts efficiently and fairly. For instance, as most registered agents would tell you, the Court of Chancery in Delaware is well known in the business world as being one of the best courts for dealing with corporate issues.
In fact, most investors might only be willing to work with corporations that are founded in Delaware to make use of this situation. Lastly, some states might have privacy laws that might augur well with your needs. For instance, if you would like to keep the information on business ownership private, some states will not require you to publicize this information.
You Will Face Double Compliance Needs
In case you still want to do business in your state after incorporating in another state, you ought to register your business in both states. While you will have to register it as a domestic entity in the state of incorporation, it will be a foreign entity in your home state. As such, you will have to comply with the state laws for both states.
This will be anything in the line of filing annual reports, remitting appropriate taxes as well as working with registered agents. If you ignore compliance, you might have to deal with hefty fines.
Double Taxation Will Also Be an Issue
Although most entrepreneurs will walk the out-of-state incorporation path to enjoy reduced taxes, the irony is that they may have to pay double taxes to the state of incorporation and their home state. States typically need corporations within their jurisdiction to pay taxes in the form of corporate tax, annual reporting fees or franchise tax. In a nutshell, businesses have to pay taxes to any state where they have physical or economic nexus.
Physical nexus is all about having some form of physical presence within a state. On the other hand, economic nexus involves taking advantage of the economy of a state for your gain.
You Can Always Domesticate
There are instances where you might embrace out-of-state taxation and later feel that you might have made a mistake. Alternatively, the issues that made this move worthwhile might no longer be present. Luckily, you can relocate the ‘home’ of your business to a different state through domestication, though not all states allow this.
However, domestication should never be taken lightly as it requires dissolution in the current ‘home’ state. Failure to proceed in the right manner might lead to the dissolution of your company before it can even gain a foothold in the new state.
The laws of incorporation need key attention to detail before making any move. You might choose to incorporate out of state for a specific benefit only to shower yourself with some disadvantages. Be sure to assess the situation of your business to make the right moves.