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.
How Does a Corporation’s Principal Place of Business Determine Diversity Jurisdiction?
Determining a corporation’s principal place of business is important for the purposes of civil litigation. A company of any kind can only be sued in the place in which it is incorporated and the state in which it has its principal place of business. A corporation is considered to be a citizen of both of these states. And, as we noted above, the state in which a corporation is incorporated and the state in which it has its principal place of business are not always the same.
The term “diversity jurisdiction” refers to situations in which the person or entity that is suing, the plaintiff, another person or entity, the defendant, are from different states. So, the issue arises as to which court is the right court in which to file the lawsuit.
Corporations have two states in which they may be sued. As discussed above, the first is where the nerve center of the business, its principal place of business, is located and the second is its state 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. So it can be sued in the state courts of both Delaware and California
If the plaintiff, the entity who is suing the corporation, does not live in either of those states, there is what is called “diversity” of citizenship between the plaintiff and defendants. If there is diversity of citizenship between the plaintiffs and defendants and the amount in controversy requirements are met, then the case can be filed in a federal court. However, if either of these requirements is not met, then the case would have to be filed in a state court.
So, before a person decides to file a lawsuit in federal court, if a corporation is one of the parties, it is important to locate a corporation’s principal place of business for the purpose of determining its state citizenship.
Many legal experts believe that there are advantages in filing a lawsuit in federal court. They may believe that federal judges are superior in background and education to state judges. Federal judges are not elected, but rather are appointed, which some experts think is important. The federal court system processes lawsuits more quickly and efficiently than some state systems. This may be because federal courts have more monetary resources. Most federal cases are scheduled for trial sooner after filing than are similar cases in a state court.
Another difference is that in federal court is assigned to a single judge from beginning to end, something that is less common in state courts. This might be advantageous because it means that the court will exercise more control over the pacing of the phases of a case and may work actively to speed the process and narrow the issues for trial. In state courts, cases may languish for long periods of time without making forward progress.
This is why a part may wish to determine that there is diversity jurisdiction in a federal court. On the other hand, some lawyers who represent plaintiffs in lawsuits consider federal courts to be more hostile to plaintiffs than are state courts and would prefer to file a lawsuit in a state court.
Why Is a Corporation’s Principal Place of Business Important to the IRS?
The IRS has an interest in locating a corporation’s principal place of business, because that is likely to be the place where its books and records are kept. Additionally, the IRS may allow business owners to take certain tax deductions, depending on where their principal place of business is located.
For example, a sole proprietor may designate their home as their principal place of business in order to exploit certain available tax deductions, such as the ability for them to deduct a portion of their property taxes, mortgage, and other expenses related to home ownership.
However, the portions of the home designated for business purposes must be used regularly for business purposes only, and not for personal purposes such as sleeping or entertaining. The IRS is legally permitted to investigate homes designated for business purposes if they have any suspicions as to the true purpose of the home.
Should I Hire an Attorney If I Need Help with Principal Place of Business Issues?
If you should wish to file a lawsuit against a corporation in federal court, then determining its principal place of business is very important. Thus, it may be in your best interests to consult with an experienced business attorney if you are planning on suing a corporation in federal court. Clearly determining diversity jurisdiction can be a complicated and technical question that requires professional expertise.