When starting a new venture, one of the first questions you may have is: Where do I form my business? The answer can differ based on where you live. But for the most part, the answer is really simple. Form your business in the state where you are going to operate your business.
While many people know that states such as Delaware and Nevada have tax benefits, they often don’t realize that you have to be licensed to do business in the state in which you are operating your business. For example, you could form your LLC in Delaware, but if you are living in and running your business out of New York, then New York is going to require you to complete something called a foreign qualification (which puts the state on notice that you are operating a “foreign entity” in their state). Moreover, they’re going to require you to publish — so you are still stuck with those super pricey publishing costs anyway.
States allow a foreign entity to do business in their state because they will receive taxes from the work done in that state. Meaning, New York would allow your Delaware company to be registered as a foreign entity, because you’ll be paying New York taxes come the end of the year.
No matter where you form your entity, you have to be qualified to “do business” in any state where you will be operating your business. This has to do with something called interstate commerce, which stems from the commerce clause in Article 1, Section 8, Clause 3 of the U.S. Constitution. What counts as doing business varies, but some key factors include having offices or distribution centers in the state, employees who work in that state, an advertising or marketing campaign targeted at that state or even shipping goods to that state. Remember, these requirements are state-specific, so you should contact an attorney if you are working outside of your home business state.
Forming your business is an exciting process filled with many decisions. Take it from me: It’s crucial — and well worth the money — to talk to an attorney before choosing the state in which to form your business, or you could end up wasting your money.
*This document is for informational purposes only and should not be construed as legal advice. Genavieve Shingle is an attorney only licensed in the State of New York and the distribution of this guide does not constitute an attorney-client relationship.
Genavieve Shingle is a member of the DailyWorth Experts program. Read more about the program here.