One of the biggest decisions when starting a business is to decide where the corporation will be incorporated. This decision determines the state laws that govern the corporation, which in turn shape the rights of the shareholders, board of directors and corporate officers as well as the rights and remedies relating to creditors. Finally, the choice of where to incorporate will determine the amount of state taxes paid by the corporation, and state tax rates vary greatly. The state of incorporation is the domicile of the corporation.
State of Incorporation
Incorporation is the process by which a corporation is recognized as a separate legal entity under state law. To incorporate, the founders must draft articles of incorporation and file those with the relevant state agency – often the commerce department or Secretary of State – and pay any required filing fees. The corporation is then recognized by the state. The newly formed corporation must have an initial meeting in which bylaws are adopted and stock is issued, if applicable. Directors can also be elected at the initial meeting, unless they are named in the articles of incorporation.
Read More: How to Change the State of Incorporation
Operation in Multiple States
Just because a corporation is domiciled in a particular state does not limit it to operating in only that state. For a corporation to operate in a state other than its home state, the corporation must follow the other state’s protocol to register as a “foreign” corporation that is doing business within that state. Typically, this registration involves filling out forms and providing copies of the corporation’s articles of incorporation and a certificate of good corporate standing from the home state. Most states charge a registration fee for foreign corporations.
If a company wishes to change its domicile, it is not an easy process. The company will need to follow internal procedures to make this decision, as it is a question that may need to be decided by shareholders depending on how the articles of incorporation and bylaws are written. If approved internally, the corporation will then need to dissolve the corporation by following the home state’s laws. The corporation must then file the articles of incorporation, and pay any required filing fees, with the newly selected domicile state.
Most Popular State
The majority of companies traded on the New York Stock Exchange are domiciled in Delaware. Delaware law is often used as the standard when studying corporate law. The number of incorporations in Delaware indicates that its state laws are business friendly. For example, Delaware does not impose sales or personal property taxes and the fees to incorporate are low. Corporations are also required only to have a minimum presence in Delaware, but are not required to maintain an office in the state, only a registered agent.
Kay Lee began freelance writing for Answerbag and eHow in 2010. She is an attorney in Washington, DC, practicing since 2006. Lee specializes in employee benefits and executive compensation. She holds a Juris Doctor from the Columbus School of Law and a Master of Laws from Georgetown University Law Center.