State Formation Fee Considerations

April 13, 2006

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When choosing a state in which to form your business, the simplest (or cheapest) choice may not be the best choice. Another state's lower formation fee should not be the deciding factor in forming the entity there, when the owner will be doing business in his own home state as well. Clearly, the small business owner cannot avoid his home state's fee by forming an out-of-state entity, because a registration fee, equivalent to a formation fee, must be paid to the owner's home state anyway, if the owner will be doing business there.

If you are doing business in another state, but not in your home state, and you intend to use only one entity, you should consider forming the entity in the state in which you will be doing business, rather than your home state. This will result in only one fee.

If you form the entity in your home state, you will pay two sets of fees: the formation fee to the home state and the registration fee in the other state.

John is a Massachusetts resident who plans on doing business exclusively in Connecticut. If he decides to form a corporation in Massachusetts, his home state, he will pay a formation fee of $275 to the state of Massachusetts and a registration fee of $275 to the state of Connecticut (the fee Connecticut also charges to form a corporation there).

The best choice now may be for John to form a corporation outside of his home state, in Connecticut, and pay only the Connecticut formation fee of $275.

If two entities are being formed (i.e., a holding entity and an operating entity), there will be no additional costs involved in forming an entity out-of-state. The holding entity could be formed out-of-state, and the operating entity in the owner's home state.

Because the holding entity will conduct no business activities in the home state, it needn't be registered in the home state. Specifically, the activities of the out-of-state holding entity should not rise to the level of "doing business" in the home state. Thus, the cost of forming two entities, with one formed out-of-state, will be the same as forming both entities in the owner's home state.

With the option of forming your entity (or entities) either in your home state or in another state, you have the flexibility to explore which state laws offer the best levels of asset protection, and then weigh the costs involved.