Business Basics: What to Consider When Deciding Which State to File in

Foreign CorporationWhen it comes to opening your very own small business, you have a lot of decisions to make. What’s your logo going to look like, how many employees are you going to hire, have any initial marketing ideas? And on top of all that, maybe the biggest decision of all, is deciding which state to file in. You can go one of two ways with this: file in the state you’re physically located in, or file in another state. There are advantages and disadvantages to both. Ultimately, the decision should be specific to each business because, depending on the states you’re considering, and your industry, one option may be more expensive than the other.

So when it comes down to it, be sure to consider these three factors when deciding where to file your business!

 The cost of foreign qualifying.

If you choose to file your business in a state other than the one you reside in, you’ll have to go through the process of filing for a foreign qualification. This is required of any company that wishes to conduct business outside the state lines that the formation was created in. Once you’ve filed the paperwork, you’re legally able to do business in a state that was not your business’s home state. You can, of course, file the paperwork yourself, but many businesses opt for a filing service to file the paperwork for them to ease the process. Our services, personally, start at $149.

The economic health of the prospective states.

The economic health of a state can be different for different industries. Where the automotive industry might be booming in the state you’re looking at, coal mining might not be doing so hot. There are a couple different reliable resources to check up on the health of a state and your specific industry: Forbes has a good list of the best states to do business in that includes the top industries with each state, and our latest series post, ABCs of Small Business Industry is another good place to check up on the health of your industry overall.

The small business friendliness.  

There are some states that are widely recognized as friendly business states- states that are simply huge supporters of small business and entrepreneurship. Delaware, for example, has earned the nickname of “The Incorporation Capital of the World” due to it not having any corporate income tax and maintaining such a modern corporate climate and economic outlook. Check in on your home state’s business friendliness to see if it would make more sense financially, considering taxes and overall fees, to stay in your state or head somewhere else.

What is a Foreign Corporation?

The term ‘Foreign Corporation‘ sometimes confuses people. Though it can also refer to a corporation from a different country, when business advisers refer to a Foreign Corporation or LLC, they are usually talking about a domestic company with permission to operate in a state other than the one the company was formed in. This permission is often called a ‘foreign qualification,’ Foreign Corporation and it effectively registers your company with the new state so the state can collect taxes. With it, you can open up another branch of your company, or move your base of operations, without changing states. But why would a business want to do that?

Why would you want a foreign qualification?
There are a few reasons why a business chooses to qualify as a foreign entity in other states. One of the main ones being that the company simply wants to expand its operations – sales could be strong in their home state, and they figure they’ll take a crack at opening another store or office in a neighboring state. Since you need permission to do business in another state, they pursue a foreign qualification. However, some business owners also believe that they may save money on taxes by forming a business in a state like Nevada or Delaware, and then qualifying in the state they actually do business in. There are pros and cons to incorporating in another state, so be sure to weigh your options carefully.

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Business Basics – Three Advantages to Incorporating in Another State

The advantages and disadvantages of incorporating in another state are hotly debated. We’ve seen a lot of other business-filing companies and services extol the virtues of incorporating in Nevada or Delaware, but the reality of the situation is a bit more nuanced. More often than not these other companies are trying to convince you of the need of their services and, while we could do the same, we want to actually help people, not just sell them something. For most businesses, incorporating outside of their home state isn’t a good idea. You have to contend with foreign qualification fees, regulations, licensing, and, to top it all off, the main state you do business in will probably still want to collect the same amount of taxes as they would if the business was formed in its borders. So the question inevitably shifts from ‘should you go to another state?’ to ‘in what cases would forming in another state be advantageous?’. Well, you’d typically want to form outside of your home state for the following reasons.

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Q is for Foreign Qualifications

We’re onto one of the trickier letters of the alphabet today in our ABC’s of small business segment, but it couldn’t be paired better than with the foreign qualification which answers the question of what a small business should do if they want to legally operate their business in a state that may not be the same one they created the formation in.

Foreign qualifications break down a little like this. If a business wants to operate outside of the state that they formed a formation with, they need to register their business as a foreign corporation in order to obtain that kind of authority. And in many cases, this is a requirement, especially if your company expects to transact business outside of the state lines that they were formed in.
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Oh, The Places Your Business Will Go!

Most business owners start their businesses with the hope that they will expand into other cities, states, and maybe even countries.  This business growth is excellent for the economy, excellent for the business owner (is anyone against success?), and great for customers who want options closer to where they are.  But moving a business into other areas can mean increased documentation and preparation on the part of the business owner. Continue reading