Where to Incorporate

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 What Is A Corporation? What Is A Foreign Corporation?

A corporation is an entity, generally a business, that has the authority granted by law to act as a single entity. What this means is that it is distinct from the shareholders who own it. This also means that only the corporation itself can be held liable for corporate obligations, including maintaining required business records.

While there are many different types of corporations, they are generally classified according to:

  • The corporation’s business purpose;
  • The manner in which the income of the corporation is taxed;
  • The number of shareholders involved in the corporation;
  • The amount of stock that is to be issued by the corporation; and
  • Whether the corporation is incorporated for the purpose of making a profit.

In general, when a person refers to a corporation, they are referring to one of the two main types of corporations that exist under tax laws: C Corporations and S Corporations. A C Corporation is a corporation that is taxed separately from its owners, while an S Corporation is not.

Some of the benefits associated with forming a corporation include, but may not be limited to:

  • The corporation can survive changes in ownership;
  • The corporation can exist perpetually;
  • The corporation is considered to be a person, and as such, is entitled to specific constitutional protections; and
  • There is limited liability due to the fact that only the corporation itself is held responsible for its obligations.

A foreign corporation is a corporation that is incorporated in one state, but authorized to do business in one or more other states. An example of this would be how a corporation may be formally registered in Delaware, but authorized to do business in California, Florida, and Texas. Such a corporation would be considered to be a “domestic corporation” in Delaware, but would be considered as a “foreign corporation” for its operations in the other states.

In some circumstances, the term “foreign corporation” is used to describe an international company abroad that is doing business in the United States. However, the term most commonly refers to American businesses that are operating in several different states. Foreign corporations may also be referred to as “out-of-state” corporations.

What Are Some Factors To Consider When Researching Where To Incorporate?

Determining where specifically to incorporate a business can have dramatic effects on the future operations of the corporation. An example of this would be how if a business intends to have their headquarters in one state, but will actually be conducting business more frequently in a different state. Such a business would need to carefully consider in terms of selecting the jurisdiction of incorporation.

To reiterate, a business that is incorporated in one state but conducts business in a different state, is known as a foreign corporation in the second state. Foreign corporations may be associated with different license and filing fee requirements when compared to other forms of corporations.

If you are considering where to incorporate your business, you should review the following factors and make comparisons of the different areas you are considering:

  • Taxes: What are the tax rates in your area, and how do they compare to the tax rates in other areas you’re considering?
  • Fees And Costs: What are the filing fees for corporations in the different regions you are considering? If you will be conducting business in more than one state, will you be able to calculate the costs associated with interstate commerce?
  • Insolvency Laws: In the event that your business becomes insolvent, how are creditors treated under the laws where you have incorporated? What other insolvency laws may present an issue for your business?
  • Ease Of Operation: Generally speaking, it is easier to incorporate in your own home state rather than in a different state. However, the opposite may be true under specific circumstances; it may actually be more cost-efficient to incorporate in an entirely different state.

As such, you should consider these factors in great detail when determining where to incorporate. Something else to keep in mind is that there may be different factors to consider depending on the type of incorporation involved. Additionally, specific states such as Delaware and Nevada offer different incorporation benefits when compared with other states.

What Is A Delaware Corporation? What Is A Nevada Corporation?

Simply put, a Delaware corporation is one that has incorporated in the state of Delaware in order to take advantage of its corporate laws. The state’s corporate laws are among the most favorable for corporations in the United States. Additionally, it is considered to be an excellent incorporation location for corporations that have various branches throughout the U.S.

Some of the notable advantages associated with filing for incorporation in the state of Delaware include:

  • Lower franchise taxes and incorporation fees when compared to other states;
  • Corporate offices are allowed to be held by a single individual;
  • There is no need to provide addresses of initial board of directors;
  • Delaware maintains a separate “Court of Chancery,” which is specifically for businesses; and
  • Incorporation may be considerably faster and easier than in other states.

Something else to consider is that businesses that are incorporated in Delaware, but do not conduct business there, are not required to pay Delaware’s state income tax. On a similar note, non-Delaware residents who hold stock in a Delaware corporation do not need to pay the state’s personal income tax. Finally, Delaware corporations only need to have a registered agent in the state, and do not need to have any other offices in the state.

Nevada offers similar benefits to corporations as Delaware, which include:

  • All offices of the corporation can be held by a single person;
  • No state annual franchise tax;
  • No state personal income tax;
  • No corporate tax for the state on profits;
  • Shareholders are not required to disclose their identities in public corporation records; and
  • Directors, officers, and shareholders can all be non-residents of the state.

However, it is important to note that Nevada corporations are required to have a legal address in addition to a registered agent within the state.

Where Would I File A Lawsuit If I Have A Legal Issue With A Foreign Corporation?

Although the company might be registered and headquartered in one state, it is generally possible to sue a company in another state in which they are “transacting business.” Generally speaking, if the company has an office or employees in a state, they are pursuing business in that state. What this means is that they can be sued in that state for claims associated with their activities in that state. Alternatively, the lawsuit may be filed in the state in which the violation occurred.

As such, if you have a legal claim against a foreign corporation that is conducting business in the state in which you live, you can generally file a lawsuit in your own state. Finally, when determining the proper court for a lawsuit, the court will consider all of the factors which would make a particular location convenient for each party involved.

An example of this would be how it would likely be more burdensome for an ordinary citizen to fly to a different state to engage in a lawsuit, when compared to a representative of a company whose job it is to travel to other states in order to handle lawsuits that are filed against the company.

Do I Need An Attorney To Help Me Decide Where To Incorporate?

If you are considering incorporating your business, you should consult with an experienced and local corporate lawyer. An attorney will be best suited to helping you understand your legal rights, responsibilities, and options.

An attorney can also help you understand those matters as they pertain to any state you are considering. Additionally, an attorney will also be able to represent you in court, as needed.

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