One of the first decisions a business must make after deciding to incorporate involves selecting the proper state of incorporation. You are not required to incorporate in the state where your business operates; you can choose from any one of the 50 states or the District of Columbia.

In making the decision of where to incorporate, three factors typically are weighed: the location of your physical facilities, a cost analysis comparing incorporating in the state of operation versus qualifying to do business as a "foreign corporation" in the state under consideration and determining the advantages and disadvantages of each state’s corporate laws.

When analyzing these three factors, keep in mind that a corporation is referred to as a foreign corporation in all states except for the state where it is incorporated. If a corporation is transacting business in a state other than the state where it is incorporated, it must register for a certificate of authority to transact business in the other state or possibly lose access to that state's courts and face fines.

The decision of where to incorporate is typically between the state of operations and Delaware. If the corporation is a "closely held" corporation that does business primarily within a single state, local incorporation is typically the best decision. Closely held corporations are corporations that possesses the following traits: a small number of shareholders, no ready market for the corporation's stock and substantial participation by the majority shareholders in the management of the corporation. For corporations doing business in a single state, the cost of local incorporation will usually be less than incorporating in another state and qualifying to do business as a foreign corporation in that state.

A foreign corporation that qualifies to do business in another state is subject to taxes and annual report fees from both the state of incorporation and the qualifying state. Thus, the actual advantage of incorporating in a state with very low or no corporate income tax is not as great as it appears, if your business must still qualify to do business in its state of operations.

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