What Is a Domestic Corporation?
Let me explain what a domestic corporation is: it's a company that handles its business in its home country. You should know that a domestic business often gets taxed differently from a non-domestic one and might have to pay duties or fees on imported products. Typically, if you've filed your articles of incorporation in a certain state, you can easily do business in other states or parts of the country.
Understanding Foreign Corporations
Now, consider businesses located in a country different from where they started—they're called foreign corporations. Companies can also be seen as foreign when they're outside the state where they were formed. For instance, if your corporation is incorporated in Delaware, it's domestic there but foreign in every other state.
Key Takeaways
- A domestic corporation conducts its affairs in its home country or state.
- Businesses located in a country different from their origin are referred to as foreign corporations.
- Corporations may be deemed foreign outside the state where they were incorporated.
How Domestic Corporations Work
Usually, you establish a corporation by filing articles of incorporation with a state agency. From then on, all your corporation's actions are governed by that state's laws, even if you're not doing business there. So, if you incorporated under Nevada law, your company is domestic in Nevada and foreign everywhere else.
You can change which state's laws govern your corporation. To become domestic in another state, you must first dissolve it in the original state. Once that's done, file the articles of incorporation in the new state.
As a business owner, you're free to choose where to domesticate your corporation. You'll want to analyze corporate laws in different states to find the best fit. Historically, Delaware has been a top choice.
Fast Fact on Delaware
As of 2022, almost 70% of Fortune 500 companies are incorporated in Delaware. Delaware is seen as business-friendly, especially with its Court of Chancery, which handles complex corporate disputes like shareholder issues efficiently. It also has lenient usury laws, allowing banks and credit card companies more leeway on interest rates.
Special Considerations for Incorporation
When deciding where to incorporate your domestic business, don't weigh state corporate tax rates too heavily. Your corporation pays taxes in the states where it does business, not just where it's formed. Federally, there's a 21% tax rate on all income, no matter the incorporation state.
If you're doing business in another state, you generally need to register as a foreign business there, and any business conducted is taxed at that state's rates. So, incorporating in a low-tax state won't lower your bill if you're operating in a high-tax one.
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