Where to Form a U.S. Company: State of Incorporation vs. Principal Place of Business
By C. Matthew Schulz
A non-United States company expanding into the United States must decide both where to organize its U.S. company and where that company will actually operate.
Forming in Delaware, Nevada, Wyoming, or another popular state for tax purposes does not normally eliminate registration, taxes, payroll obligations, and other costs in the state where employees work and the business conducts its operations.
State of Formation and the Place of Business Are Different Decisions
The United States does not have a national system for forming corporations and limited liability companies. Companies are formed under the law of a particular state.
A company can organize in one state while maintaining its principal place of business in another.
You might form a Delaware corporation but establish its U.S. office in California, Texas, Florida, or another state. The corporation remains a Delaware corporation even though its executives and employees work elsewhere.
That adds cost and complexity.
Why Companies Consider Delaware, Nevada, and Wyoming
Delaware is particularly well known as a state of incorporation. Its corporate statutes, experienced courts, established body of corporate law, and familiarity to investors and lawyers make Delaware attractive to many businesses. But very few Delaware companies have that state as the place where employees work or the principal place of business.
Nevada and Wyoming also attract businesses. Marketing for those states frequently emphasizes relatively low taxes, privacy, or business-friendly laws.
Those considerations can matter. But an international company should not choose its state of organization by looking only at the law or taxes of that state.
An important question is: Where will the company actually conduct its U.S. business?
Operating in Another State Usually Means Registering There
Example: a German company forms and owns a Delaware subsidiary but opens its U.S. office in California. Its executives and employees work from the California office. Customers deal with that operation.
The company is subject to California law even though its certificate of incorporation says Delaware. California income tax, payroll tax, employment law, etc., will likely apply.
One Company Can Have Obligations in Two States.
This is where forming in a supposedly inexpensive or advantageous state can become more expensive than expected.
A Delaware corporation generally continues to have Delaware obligations even if it conducts all of its actual business elsewhere. Delaware corporations, for example, must file annual reports and pay Delaware franchise tax.
If that corporation operates in another state, it may also have registration fees, annual reports, franchise or income taxes, payroll obligations, business licenses, and other requirements there.
The company may also need a registered agent in both states.
The result is not necessarily “double taxation” of the same income. State income tax systems use their own rules for nexus, allocation, and apportionment. But operating through two states can mean maintaining corporate registrations and complying with filing and tax requirements in both.
For a small U.S. subsidiary with only a few employees, those recurring costs can matter.
Where Employees Work Matters
Founders who focus on their incorporation documents and overlook where their employees (including remote workers) work are likely to have increased exposure. The location where employees actually perform services can create payroll withholding, unemployment insurance, workers' compensation, business-registration, and tax obligations. An office, warehouse, store, or other physical facility can create additional state and local requirements.
Remote work makes the analysis more complicated.
A company might maintain its principal office in Texas while allowing an executive to work permanently from a home in California and another employee to work in New York. The company should not assume that its Texas office makes the other states irrelevant.
The presence of employees can create obligations in more than one state.
This makes workforce planning part of the state-selection decision.
Start With Where the Business Is Likely to Operate
Before automatically forming in Delaware or another commonly recommended state, the founders should compare the states where it might actually locate the U.S. operation.
If the founders expect to maintain its principal office and employees in one state, organizing the company in that same state can sometimes avoid maintaining corporate registrations in two states.
That does not mean Delaware is a poor choice. For some companies, Delaware corporate law, financing plans, investor expectations, or future transactions justify the additional administrative cost.
The point is to make that choice deliberately.
The “Lowest Tax State” May Not Produce the Lowest Tax Bill
A company also should distinguish the state where it is legally organized from the states that can tax its business activities.
Forming a company in Wyoming or Nevada does not, by itself, move employees, property, customers, or business operations there.
A corporation formed in a state with no corporate income tax may still owe income, franchise, gross-receipts, payroll, sales, or other taxes in states where it conducts business.
The tax analysis becomes even more important when a non-U.S. parent company owns the U.S. business.
As discussed in our article Choosing a U.S. Business Entity for International Expansion, the choice among a corporation, LLC, partnership, and other business structures can affect whether the foreign parent or owners themselves become subject to U.S. tax reporting and potential U.S. tax exposure.
Non-U.S. owners and executives who may personally relocate to the United States also should consider their own tax status. Our article U.S. Pre-Immigration Tax Planning discusses the separate federal tax-residency rules that can apply to foreign nationals moving to the United States.
State selection is therefore one part of a larger business, immigration, and tax plan.
Consider Where Executives and Key Employees Want to Live
For a new U.S. operation, the location decision is not purely about corporate law or taxes.
The company needs people.
An international business transferring an executive or manager under L-1 status, hiring specialized employees, or developing an operation that may later support an EB-1C multinational manager or executive case needs a functioning U.S. business.
Where those employees are willing to live can matter more than a modest difference in state filing fees.
Housing costs, labor markets, airports, customers, suppliers, transportation, schools, and quality of life can all affect the practical choice.
A company that selects its state solely because of tax advertising and later discovers that its executives, workforce, customers, and suppliers are concentrated somewhere else may simply create another layer of registration and expense.
Our article Strategic Immigration Pathways for Entrepreneurs discusses some of the immigration options that may be relevant when foreign business owners and executives establish or expand U.S. operations.
Be Nimble: The Principal Place of Business Can Move
A company entering the U.S. market does not need to predict its future perfectly.
The first office may be temporary. A company might initially locate near a particular customer, executive, or distributor and later decide that another state provides a better labor market, lower operating costs, better transportation, or a more convenient location for management.
Moving the principal place of business does not ordinarily require abandoning the existing corporation.
For example, a Delaware corporation that initially operates in California could later move its principal office to Texas. It would remain a Delaware corporation unless the company deliberately changes its state of incorporation.
But the move creates compliance work.
The company may need to register in the new state, establish payroll and other accounts there, update licenses and corporate records, and eventually withdraw its registration from the former state when it has actually ceased doing business there.
Simply moving the employees does not automatically terminate the company's filing or tax obligations in the old state.
Changing the State of Business Formation Is a Separate Question
A company can also consider changing the state under whose law it is organized.
Depending on the states involved and the entity type, this may be accomplished through domestication, conversion, merger, or another corporate transaction.
That is different from simply moving the company's office.
Changing the state of organization can affect contracts, licenses, tax treatment, ownership records, financing arrangements, and other legal relationships. For a foreign-owned company using its U.S. entity for L-1, E-1, E-2, or EB-1C immigration purposes, the company should also preserve clear evidence of ownership, control, and corporate continuity.
Immigration Planning Should Be Part of the Location Decision
Immigration law generally does not require an employer to incorporate in a particular state, but the place of business where employees work is relevant.
A company seeking to transfer an executive or manager to open a new U.S. office under L-1A status must establish and develop a real U.S. operation. The location of the office, staffing plans, business activities, organizational structure, and growth of that operation can therefore become important immigration evidence.
The corporate structure also matters.
As discussed in Choosing a U.S. Business Entity for International Expansion, companies planning L-1 or EB-1C cases need to preserve the required ownership and control relationship between the foreign business and the U.S. employer. E-1 and E-2 cases involve different nationality and ownership requirements.
State selection should support that broader U.S. expansion plan rather than being treated as an isolated filing decision.
Choose the Business Location Before Automatically Choosing the State of Incorporation
For many international companies, the best sequence is to first identify where the U.S. business is likely to operate.
Consider where executives will live, where employees will work, where customers and suppliers are located, and where the company expects to maintain its office and other facilities.
Then compare the advantages of organizing in that state against the advantages of Delaware or another state.
A company may still decide that Delaware is worth the additional registration and annual compliance costs. Another company may conclude that forming directly in the state where it will actually operate is simpler and less expensive.
Both can be rational choices.
The mistake is assuming that incorporating in a low-tax or business-friendly state means that the company can ignore the state where it actually does business.
For an international company entering the United States, the state of incorporation, principal place of business, tax structure, ownership structure, and immigration strategy should be planned together.
SchulzLaw advises international companies, business owners, executives, and managers on U.S. business formation and immigration planning, including L-1, EB-1C, E-1, and E-2 matters.
This article provides general information and does not constitute legal or tax advice.