Principal Place of Business vs. State of Corporation

A corporation is created by the corporate law of a particular state. It is legally independent of its shareholders and management -- it can be taxed separately, and it can act as either plaintiff or defendant in a lawsuit. Although a corporation is an abstract entity, its operations are centered in a particular location, known as its principal place of business.

State of Incorporation

A corporation's "state of incorporation" is the state that approved its Articles of Incorporation. No matter where a corporation does business, its internal affairs are governed by the laws of the state that incorporated it. Although a corporation does not have to do business in its state of incorporation, it must appoint a registered agent who is a state resident to receive legal correspondence on behalf of the corporation. Delaware is perhaps the most popular state of incorporation, because its corporate legal system is well-developed and because its judges are experienced in corporate law. The state of incorporation levies an annual franchise tax, or its equivalent, in exchange for maintaining the company's corporate status.

Read More: How to Change the State of Incorporation

Foreign Corporate Registration

A corporation must register as a "foreign corporation" wherever it does business outside its state of incorporation. For purposes of corporate law, "foreign" simply means "out of state" -- a Nevada corporation and a Mexican corporation would both be considered foreign corporations in California. A corporation that is incorporated in Delaware with its principal place of business in Florida, for example, must register as a foreign corporation in Florida, even if its headquarters, its factories and its customers are all located in Florida. The primary reason for requiring foreign corporations to register is to ensure that they pay state taxes on income derived from in-state activity.

Principal Place of Business

Determining a principal place of business is a simple matter for some corporations. For large or dispersed corporations, however, the determination might involve ambiguity. If a corporation is headquartered in San Diego, with most of its factories in Houston, it is not intuitively obvious which city should be selected as the corporation's principal place of business. However, most states require a corporation to select its corporate headquarters as its principal place of business and to file the address with the state Secretary of State.

Diversity Jurisdiction

The location of a corporation's principal place of business can become particularly important if the corporation becomes a party to a lawsuit. If the corporation is sued in a state court, it may wish to remove the case to a federal court for various reasons. One of the main grounds for removal of a case to a federal court is that the plaintiff and defendant are from different states. A corporation is "from" both its state of incorporation and the state where its principal place of business is located.

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