Where should you incorporate your business?

I was involved in a discussion today with an entrepreneur who was planning to incorporate his business but was wondering where to do it. He is located in California and was asking whether he should stay there or incorporate somewhere like Delaware or Nevada. I have written before about the whether or not you want to incorporate, but the location of your incorporation is another discussion you should have with your attorney. You can choose to incorporate your business in any state, though you will typically want to file in your home state (the state where your operations are located) unless you have a compelling reason to choose elsewhere. Filing in a different state does not excuse you from the filing requirements and corporate taxes of your home state. If you are located in California, you are going to have to pay California taxes and fees either as a domestic California corporation or as a "foreign corporation", which is a corporation filed in another state.  In addition, you will likely have to pay for a registered agent in the state you choose if you do not have an office there.  So choosing another state because it has lower fees doesn't necessarily work.

There are many companies that choose to incorporate in Delaware even though almost none of them are actually based there. In fact, approximately 60% of the Forture 500 companies are incorporated in Delaware. There are two main reasons for this: (1) the Delaware corporate laws are generally favorable to management, and (2) Delaware has created a special Court of Chancery whose jurisdiction is to hear nothing but business law cases. See, in other states, your business case could be heard by the same judge who just heard a criminal matter, or a domestic dispute, or an environmental action. The Delaware Court of Chancery's focus on corporate law provides a certain amount of predictability and consistency that you may or may not find in other states.  However, many large and small companies will choose for a variety of reasons to incorporate in their home state (for example, even large tech companies such as Apple Inc. and Microsoft Corporation are incorporated in California and Washington respectively).

Nevada is also mentioned on occasion, primarily because it has liberal rules with respect to privacy, very pro-business laws, and a beneficial tax policy (read: no corporate, franchise, or income taxes). It has also developed a court similar to Delaware's, but because it has not been around nearly as much, it has much less established case law.  New York is a state that is often used as the governing state law in commercial transactions, but getting through the incorporation process there can be onerous.  And some states have laws that you might prefer to do without.  California, for example, has a very strict policy of not enforcing non-competition agreements other than in connection with the sale of a business.

Again, you should consult with an attorney who can help you sort through these issues.  I often have this discussion wtih new clients as part of a free initial consultation, so the cost should not get in your way.   But you need to have this conversation to prevent making mistakes that will cost you much more in the long run.  The bottom line is that unless you find factors that outweigh any deficiencies of your own state's laws, you will generally be better served in your home state.