The principal place of business of a company is the primary location in which its business operations are managed. This is generally where the business’s books and records are kept and is often where the chief executive of the firm and other senior management personnel are situated and do their work
Determining the principal place of business of a company is not always a straightforward matter. In the case of a business that operates only in one locality or is a sole proprietorship, it might be relatively easy; the business’s principal place of business is the state in which their store or another facility in which they conduct most of their operations is located. A principal place of business refers to the main location in which a company conducts the bulk of its operations.
However, the same cannot be said for larger corporations. A large corporation might have more than one domicile and it is likely to have operations in more than one state. One domicile for a corporation is always the state in which it is incorporated.
If a corporation’s principal place of business or headquarters is in another state, that location is also considered its domicile. The legal meaning of domicile is the state of citizenship of a person or entity. Jurisdiction is important for legal purposes because that is the court in which a person or business entity can be sued.
Although most corporations are initially incorporated in the same state that is their principal place of business, certain states, usually Delaware and New York, are popular places to incorporate because they have business-friendly laws. Also, their courts have generated well-developed bodies of corporate case law and their judges are considered knowledgeable about business issues.
So, many U.S. corporations are incorporated in Delaware, but maintain their principal places of business in other states, so they have two domiciles.
Before 2010, courts were divided on the issue of how to determine a corporation’s principal place of business. That was because of the fact that many large corporations often operate in multiple states. In 2010, the U.S. Supreme Court provided resolution of the definition of a corporation’s principal place of business. The Court held that a corporation’s principal place of business is the place where a corporation’s officers direct, control, and coordinate the corporation’s activities.
The Court also characterized a corporation’s principal place of business as the “nerve center” of the operation. Usually, a corporation’s nerve center would be the place where it maintains its headquarters, if, of course, that the headquarters is the actual center of direction, control, and coordination for the corporation. It is. its true “nerve center,” and not just a place to which board members travel on occasion for board meetings.
Although courts had in the past applied a variety of tests to determine a corporation’s principal place of business, the Supreme Court in the case of Hertz Corp. v. Friend, the Supreme Court,decided that the “nerve center” test would be the test to apply in all cases. In the Hertz opinion, the court explained that a corporation’s “nerve center” is the place where “a corporation’s officers direct, control, and coordinate the corporation’s activities.”
For example, if a company’s officers direct a company’s business activities in New York, then its principal place of business is New York regardless of the company’s degree of activity in any other state. Per the Hertz standard, a corporation has only one principal place of business.
However, having only one principal place of business does not preclude the corporation from being a citizen of multiple states. For example, when a corporation is incorporated in a different state than the state in which its headquarters are located, it is a citizen and it can be sued in either of the states in which it is domiciled.
So, in order to determine a corporation’s principal place of the business, courts generally consider two facts:
- The state in which the largest volume of the corporation’s operations is located; and
- The state in which the largest number of the corporation’s top executives is located.
If the answers for both questions are the same, then that state would be the corporation’s principal place of business. However, if the answers differ, then courts look to determine in which state its nerve center is located.
Corporations are often required to designate their principal place of business with the Secretary of the State of the state in which they are incorporated, but this requirement varies depending on individual state laws. Identifying a corporation’s principal place of business is important both for the Internal Revenue Service (IRS), as well as for determining “diversity of citizenship” for the purpose of jurisdiction.