Where to Incorporate
You can incorporate in the state where your corporation expects to conduct a majority of its business, or you can incorporate in another state. If you incorporate in one state and end up conducting business in another, you will have to qualify to do business in that state and it will most likely involve more incorporation fees, filing requirements and paperwork.
However, many businesses (mostly publicly-held corporations or companies that operate in multiple states) do form in other states even though the business primary headquarters is in another state because of tax benefits and flexibility in management structure. If you are a small business only operating in one state, it could cost you more time and money to incorporate in another state besides the one you are conducting business in. Find out what the comparative costs would be if you formed a legal entity in a particular state versus the costs of registering as a foreign corporation in that state. A corporation doing business in a state other than the state where the legal entity was formed is considered a foreign corporation.
You will want to find out what the states corporate laws are in regards to the rights and responsibilities of corporate shareholders and directors and in regards to the rights of creditors. Further, each state has a different tax rate so find out what that number is for the states you are considering.
Common states to form a legal entity
Some states provide additional incentives and lower tax rates than others; the most common being Delaware and Nevada.
Delaware is a popular state to form a legal entity. According to the Delaware Division of Corporations, more than 60% of the Fortune 500 and 50% of U.S. publicly-traded corporations on the New York Stock Exchange are incorporated in Delaware. Why? The Delaware General Corporation of Law is one of the most advanced and flexible in the nation; offers inexpensive incorporation fees; has a court system with over 200 years of legal experience; keeps the corporation statute and business laws current; and the Delaware Secretary of State operates like a business, rather than a governmental bureaucracy.
Nevada is the runner up for incorporation services and boasts benefits to business owners. If you form a legal entity in Nevada, directors and officers may be nonresidents, stock holders can remain private, and one person may hold all corporate officers. In addition, Nevada does not have an annual franchise tax unlike other states.