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In What State Will You Form Your Business?

Oct. 29, 2024

Key Takeaways for Business Owners

  • Your business can have only one state of formation

  • Formation costs and maintenance fees vary sharply by state

  • Forming outside your home state adds administrative layers

  • Court systems differ in how efficiently they handle business disputes

  • Each state sets its own limits on fiduciary duty waivers

Welcome back to the second article in our business formation series. If you’ve been keeping up with our publications, you know that choosing a business entity is a pivotal decision for any business owner. Our previous article helped you understand the basic entities that are available.

But one question remains: where will you form your business? Otherwise known as the state of formation, it is the state where a corporation, limited liability company, or partnership is created.

Your chosen state can significantly impact your business’s legal and financial future because every jurisdiction’s corporate system is unique. So, how do you determine the best state for formation? Let's explore the key factors to consider.

Factors to Consider When Choosing a Jurisdiction of Formation

Every business, whether organized as a corporation, limited liability company (LLC), or partnership, has only one state of formation - the jurisdiction that governs its internal affairs, ownership rights, and management structure.

This is the state whose laws determine how your formation documents, such as the certificate of formation or operating agreement, will be interpreted. Because those laws guide decision-making, define fiduciary duties, and outline how disputes are resolved, choosing your state of formation is ultimately a long-term governance decision rather than a simple filing step.

Ongoing Costs: Franchise Taxes and Annual Report Fees

Every business must pay recurring maintenance fees that apply to its state of formation, whether or not the business turns a profit. The two most common are the franchise tax and the annual report fee.

A franchise tax is a charge for the privilege of existing as a legal entity with limited liability, while the annual report fee covers the cost of keeping your registration current with the Secretary of State. Together, they form the backbone of each state’s compliance system.

These obligations differ widely from one jurisdiction to another. In Delaware, franchise taxes can range from a few hundred to several thousand dollars, depending on the share structure. In contrast, New Jersey requires a single $75 filing fee each year for most entities.

What seems like a small difference during incorporation can grow into a material cost over time. And if you form your business in one state but conduct operations elsewhere, you will likely have to register as a foreign entity, paying both states for the right to operate.

Registered Agent and Administrative Efficiency

Every company that’s formally organized must appoint a registered agent in the state where it was created. The agent serves as the state’s official contact for lawsuits, tax forms, and government correspondence. If your principal place of business is located in the state where the company was created, then the address of your principal office may serve as the address for the registered agent. Otherwise, you will need to pay for a professional registered agent service. 

You should not use the address of a professional registered agent as the address of an office for your business in the state.  Registered agents often provide a separate service, a virtual office, for that purpose. They will typically forward postal mail to you.

Contracts for professional registered agent services must be renewed annually.

Suitability of Courts for Resolving Disputes

Once a company is formed, the laws of its formation state govern not only its structure but also how internal disputes are resolved. The operating agreement or stockholders’ agreement you sign is interpreted by that state’s courts, meaning that your choice of jurisdiction effectively decides where future disagreements among owners or managers will play out. For founders, that decision can shape how predictably and efficiently the company can respond when conflicts arise.

Delaware’s Court of Chancery is often favored for that reason. It specializes in corporate cases and has developed a consistent body of precedent, which makes outcomes more predictable and easier for investors to evaluate.

New Jersey’s Superior Court, by comparison, is a general trial court that handles business cases alongside a broad mix of other civil matters. While its decisions are sound, proceedings can be slower and less tailored to corporate disputes.

Suitability of the Applicable Law

Under the internal affairs doctrine, the state of formation controls the company’s internal relationships regardless of where the business operates. That means the same operating agreement, certificate of formation, or bylaws could be interpreted very differently depending on which state’s statute applies.

Some states have refined their business statutes over decades to meet modern governance needs. Delaware’s General Corporation Law and New Jersey’s Revised Uniform Limited Liability Company Act are both comprehensive, but Delaware’s system is especially prized for clarity and flexibility. Its statutes expressly permit broad waivers of fiduciary duties within an LLC’s operating agreement, giving investors and legal counsel greater predictability in drafting.

Flexibility of Fiduciary Duty Waivers

Fiduciary duties are the core obligations that owners, managers, and directors owe to a business entity and to one another. They generally fall into three categories:

  • The duty of loyalty

  • The duty of care

  • The duty of good faith and fair dealing

These standards exist to prevent self-dealing, reckless conduct, and other actions that place personal interest above the company’s. Yet the extent to which these duties can be limited or redefined depends on the law of the formation state.

Some states, most notably Delaware, allow limited liability companies (LLCs) and limited partnerships to waive or modify fiduciary duties through their operating agreements. By contrast, states like New Jersey permit only partial modification, requiring that certain duties remain intact.

Conclusion

Our New Jersey business lawyers help you understand the different requirements, processes, and regulations for different jurisdictions of formation. Our goal is to help you make a decision that ultimately benefits your business and helps you achieve your personal and business aspirations.

Our next article will discuss the benefits of incorporating your business in Delaware versus New Jersey. Join us next time for more insightful tips on business formation guidelines for New Jersey business owners and managers.

Are you wondering about any of the issues mentioned above? Please email us at  Info@staturelegal.law or call (732) 320-9831 for assistance.

At Stature Legal, our New Jersey business attorneys give business owners the clarity they need to fund, grow, protect, and sell their businesses. We are trustworthy business advisors keeping your business on TRACK: Trustworthy. Reliable. Available. Caring. Knowledgeable.®

FAQs

Can I Form My Business in Delaware but Operate Mainly in New Jersey?

Yes, but doing so means you’ll need to register your Delaware entity as a foreign business in New Jersey. You’ll pay fees and file reports in both states, and you must maintain a registered agent in each. This setup makes sense for companies seeking Delaware’s investor-friendly laws, but can increase administrative costs for local businesses.

What Happens if My Business Expands to Other States Later?

When you start operating in another state, for example, hiring employees, opening an office, or regularly serving clients there, you’ll need to register as a foreign entity in each of those states. This allows you to do business legally and maintain your limited liability protection everywhere you operate.

What Are Fiduciary Duties, and Why Do They Matter When Choosing a State of Formation?

Fiduciary duties are the legal obligations that company owners and managers owe to each other and to the business itself, such as loyalty, care, and good faith. Some states, like Delaware, let businesses narrow or redefine these duties by contract, while others, like New Jersey, require that certain duties remain intact. The flexibility you need should guide your state selection.

How Do I Decide Which State of Formation Is Right for My Company?

There’s no single right answer. The best choice depends on your growth goals, investor plans, risk tolerance, and where you actually do business. A conversation with a business attorney can help you weigh cost, court predictability, and legal flexibility to make a formation choice that fits your long-term strategy.


Explore Our Business Formation Series

Dive deeper into the essentials of establishing and managing your business in New Jersey with our comprehensive series:

Each article is crafted to provide you with the knowledge and tools necessary for successful business formation and operation in New Jersey