Forming the Entity in Your Home State

When choosing the state in which to form your business entity, the simplest option for the small business owner is to form the entity in his or her home state, where, typically, all of the business activities will be conducted.

Forming an entity out-of-state will create additional costs. The out-of-state entity will have to register to do business in the owner's home state. This registration fee is analogous to the fee that is charged to form the entity in his home state.

Thus, the owner would pay two sets of fees to form the entity out-of-state, but only one fee if the entity were formed in the owner's home state. Note, if you are going to do business in other states, you will need to registration in those states in any event.

But from an asset protection perspective, these extra fees may be worth the cost. Some states' laws are considered more business-friendly than others and may afford you more protections for your business and assets. In this way, the extra costs are like paying for extra liability protection.

John is a Massachusetts resident who plans on doing business exclusively in Massachusetts. If he decides to form a corporation in Connecticut, he will pay a formation fee to the state of Connecticut and a foreign registration fee to the state of Massachusetts. The simplest choice would be for John to form a domestic corporation in Massachusetts and pay only Massachusetts's formation fee. However, in deciding where to form the entity, the small business owner should consider other factors, aside from the initial state fees involved.