Okay, you have made the decision to go ahead and incorporate to protect yourself. The next question is where is the best place to do so?

What is the Best Location to Incorporate?

One of the most misunderstood elements of business law is jurisdiction. Jurisdiction simply refers to the issue of what laws control particular situation. Actually, a better way to put it is whose laws control? In many business law niches, state laws are the guiding light, not federal law. The formation of business entities is one such place.

So, what location should you pick? In most situations, it is the state you will be conducting the business in. Remember, state law is controlling here. Nearly all states view businesses being run within their borders as falling under their jurisdiction. This means you are required to comply with the laws of the state. You are also required to pay taxes and fees the state requires for the running of your business.

Ah, but what about Nevada? For those new to the process, Nevada is touted as a great place to form your business entity. The state has very minor taxes, so many trump it as the best state to incorporate. There is, however, one problem. If you incorporate in Nevada, but run your business out of an office in your state, you are almost always violating the laws of your state. When tax agencies and regulatory groups look at business entities, the state of incorporation is not the issue. Instead, the issue is where is the business actually being conducted. If you incorporate your business in Nevada, but run it out of Los Angeles, you could be in big trouble. California will eventually figure it out. When they do, you will be penalized and assessed back taxes. It is an ugly situation.

There is one way around this situation. It involves a double incorporation strategy. Essentially, you incorporate one business in Nevada and one in your state. The Nevada entity runs the basic business. The entity in your state then manages the Nevada entity for a fee. This may sound great at first glance, but it is an expensive option. Make sure you talk with an attorney before going down this road.

If you are incorporating on your own, you should probably stick with the state you will be running the business out of. If you have other ideas, make sure to sit down with a lawyer or accountant to discuss your plan.