What are the considerations when
choosing a state of formation for your
business entity, that is the state in
which you're going to register your
business entity and exists as a business
entity within that state? Well to start
with, in any state in which you carry on
business activity you will be required
to register in that state. Now that
doesn't mean you have to form in that
state you can form in your business
entity in another state and file to do
business within that state where you're
doing business and that's a requirement
failure to do so has legal consequences
to it. But that's a very common activity
that founders of startup ventures or or
larger corporate entities will
reorganize in a different state and
simply file to do business in another
state. Well the reason these corporations
or companies do that is because there
are certain considerations certain
advantages to being formed in a separate
state but doing business in another
stat. So those considerations generally
to start with are based around legal
considerations. So in determining your
state of interest you want to look one
towards what are the state laws
regarding business activity and how
could that potentially affect your
business activity. Well this is a common
reason why lots of businesses choose
Delaware for example to form a
corporation. Delaware has a very
developed form of corporate law. If they
you form a contract with a company
that's organized in Delaware
lots of times the company will include
in all of its contracts that Delaware
law is to apply to those contractual
relationships and to varying degrees or
extent, that is enforceable for the
application of substantive law, the
actual rules that govern the activity or
potential liability of the corporation
and its owners, directors,
members, etc. So generally you'll
look at the legal structure and say,
are there any state laws that that in some
way detriment me in one state versus
benefit me in another. Delaware tends to
be very director friendly for potential
liability for decision making and things
like that, so and it has a special record
a Chancery Court dedicated towards
business issues. So again it's a very
developed state of the law so the owner
so a corporate entity status can feel
rather comfortable in doing business
there, so that's a common reason why you
would say choose Delaware or a separate
state to do business in that state.
Another question you ask yourself is do
I want to potentially be called into
court in my state of incorporation.
So say you incorporate in a second state
you incorporate in Alabama but you do
business in the primarily do your
business in Georgia. Well if you do
something that gives rise to a legal
action being incorporated in a state
also subjects you to that state's
personal jurisdiction, so the individual
claiming or bringing the tort action
against you or contract action or any
action could also see you in Alabama as
well as Georgia for that conduct.
So if you don't want to be called into
court in Alabama you should consider
limiting your operations there and
potentially incorporate in a different
state in this case you may want to
incorporate and do business in Georgia.
So the ability to defend yourself in a
state or travel to that state for that
purpose again is an important important
consideration. And then lastly you you
look to tax consequences most states are
going to have a state income tax that
apply to business entities. So you'll
look at that state income tax rate to
determine whether there's any advantages.
There lots of times larger corporations
can negotiate with a state a given tax
rate reduction or something of that
nature or tax exemption from certain
types of
transactions carried on in the state
this is something that Amazon frequently
goes through when doing business in a
state. So anyway you'll you look at the
income taxation on the activities of the
business in that state and how that will
be allocated to the state. You also look
at property tax issues for example, this
is generally with the locality where
your operations are located but what is
the tax rate on property that you'll
have to pay annually for on the value of
that property and is there any
exemptions available, is there any are
there more favorable terms in one area
versus another. So again this will affect
your choice of where you carry on
business and where you identify as your
your state of headquarters because again
even if a lot of your activity is
carried on in another state your state
of business formation you may allocate a
certain percentage of your revenue
generated to the activities that take
place in that state of incorporation.
So this is a way to take advantage of a
more favorable tax structure in a given
stat. So the those are your primary
considerations your potential that you
could be called into court in the
other state the potential tax
repercussions of of being in the state
and then whether you want to be
subjected to jurisdiction or potential
potentially being called into court in
the other state, those your again your
primary considerations as to as to where
you're going to form your business
entity.