Can a business incorporate in one state and do business in another? That depends entirely on what you hope to achieve. While there are certainly legitimate reasons for doing so, other reasons you might have heard for taking this action are rooted in fallacy or erroneous thinking.
Let's explore some of these ideas, find out which ones are true and which ones are patently false.
Privacy Concerns
One reason you might want to consider incorporating in one state and doing business in another has to do with privacy laws.
Whenever a new business comes into being, every state has its own rules for what information about the fledgling enterprise must be made public. States like Wyoming, Nevada, and New Mexico have become wildly popular with business owners looking to prevent personal information from being publicized.
Depending on the situation, these states and others like them might not collect beneficial ownership information. Beneficial ownership refers to the individuals that enjoy the benefits of owning an asset. This might not be the same persons whose name is on the title of the property.
This means that if you're a beneficial owner of a company and you don't want the rest of the world to know, your secret is safe in these states.
Incorporation in Delaware
Sometimes circumstances force companies to incorporate in Delaware, even if they’re going to continue to do business in their home state. That’s because enterprises seeking outside funding sources find that their investors require incorporation in Delaware to receive the investors’ support.
These financiers feel more secure with Delaware's Court of Chancery and the state's laws that are more beneficial to large corporations than any other state in the country. Any pending litigation is fast-tracked in Delaware, ensuring a swift and responsive legal process.
That’s certainly a much different scenario in many states, where corporate litigation can take months or even years.
However, unless you’re a big corporation like Coca-Cola or Facebook who regularly expects to get sued, you’ll probably not see much benefit from incorporating in the state.
Incorporating in a Low-Tax State
Suppose you live in a high tax state (such as California or New York). In that case, you might have heard about the idea of incorporating your business in a low tax state to save money. According to the theory, by incorporating your business in some other no-tax or low-tax state, you would be blessedly free from having to pay state income taxes in your state of residence.
While this is a nice idea, the problem with this is that any state in which you conduct business operations gets to tax at least a portion of your profit using an arcane apportionment formula. This means an individual from a high-tax state who incorporates in a low-tax one won’t save a single penny on taxes.
Another problem with this plan is that you also need to register with your home state if your corporation does business out of state. Once you register, your home state will automatically know about this business activity and tax its profits.
If you want to pay fewer taxes, you should move your business to a low-tax or no-tax state. However, to maximize your savings, you should consider establishing residency in that other state.
Let Us Be Your Guide
Emerald Law provides growing businesses with a complete suite of legal services.
With our expertise and vast knowledge, we’ll guide you through the often-treacherous legal landscape so you can emerge unscathed, ready to take on all competitors.
Contact us today!