Determining a business’ principal place of business is not always a straightforward matter. For a local business or sole proprietor, you would be right in guessing that the business’ principal place of business is their store or where they do most of their business. However, the same does not hold true for larger corporations.
Before 2010, many circuit courts were split as to where a corporation’s principal place of business truly was, considering that often businesses operate in more than one state. In 2010, the United States Supreme Court clarified the definition of a corporation’s principal place of business. The Court concluded that a corporation’s principal place of business is defined as the place where a corporation’s officers direct, control, and coordinate the corporation’s activities.
The Court also referred to a corporation’s principal place of business as the “nerve center” of the corporation. Typically, the nerve center is the place where the corporation maintains its headquarters, given that the headquarters is the actual center of direction, control, and coordination of the corporation’s activities, i.e. the “nerve center,” and not just a place for board members to travel to occasionally for board meetings.
In order to determine a corporation’s principal place of the business, courts generally consider two questions:
- What state has the largest volume of the corporation’s operations; and
- What state has the highest number of the corporation’s top executives?
If the answer for both questions is the same, then that state will typically be determined as that corporation’s principal place of business. However, if the answers differ, then courts will look at which state maintains the substantial preponderance of the operations, or where the nerve center is located.
Corporations are often required to designate their principal place of business with the Secretary of the State, but this requirement varies depending on individual state laws. This is important because a corporation’s principal place of business is important both for the Internal Revenue Service (“IRS”), as well as for determining “diversity of citizenship.”
Determining a corporation’s principal place of business is important for litigation purposes. Diversity jurisdiction is essentially a test to figure out whether a court has the ability to hear a case. Generally, in order for a court to have diversity jurisdiction, complete diversity is required.
Another requirement is that the amount in controversy exceeds $75,000. Complete diversity is achieved when none of the plaintiffs are from the same state as any of the defendants.
Importantly, a corporation is treated as both as a citizen of the state in which it is incorporated and the state in which the corporation’s principal place of business is located. A corporation’s incorporation location does not always have to be the same as the corporation’s principal place of business.
Thus, corporations have two home states where they may be subject to general subject matter jurisdiction. As discussed above, the first is where the nerve center of the business is located.
The second is essentially the paper home of the corporation, or the state in which the corporation filed its initial certificate of incorporation. For example, a business may choose to incorporate its business in Delaware, but the nerve center of the business may be located in California.
If the diversity of citizenship and the amount in controversy requirements are met, then the case is deemed to be appropriately filed in federal court. However, if either of the aforementioned requirements are not met, then the case will likely be dismissed due to the lack of diversity jurisdiction.
Therefore, it is extremely important to locate a corporation’s principal place of business first, before you proceed in bringing your lawsuit against the corporation in Federal court.
Although this may seem obvious, the IRS needs to know a corporation’s principal place of business, because that is likely the location of the corporation’s books and records. Additionally, the IRS allows many business owners to take certain tax deductions, depending on where their principal place of business is located.
Sometimes, a sole proprietor will designate their home as their principal place of business to receive certain tax deductions, such as the ability for them to deduct a portion of their property taxes, mortgage, or other expenses.
However, the portions of the home designated for business purposes must be used regularly for only businesses purposes, i.e. not used for personal uses such as sleeping or entertainment. The IRS has the right to investigate homes designated for business purposes if they have any suspicions as to the true purpose of the home.
As can be seen, determining a corporation’s principal place of business is very important if you wish to file a suit against the corporation in federal court. Thus, it may be in your best interests to consult with a knowledgeable and well qualified business attorney if you are planning on suing a corporation in federal court, as determining diversity jurisdiction may be complicated.