Incorporating Your Business First things first: Know where you're doing business.

Q: I haven't yet researched the legal aspect of filing the required documents for incorporating my business. Can my business incorporate in another state with cheaper filing fees and then later "transfer" to the state I'm living and working in, without incurring additional filing fees?

A: One of the first decisions a business owner must make after deciding to incorporate involves selecting the proper state of incorporation. You're not required to incorporate in the state where your business operates; you can choose from any one of the 50 states or the District of Columbia.

A corporation is referred to as a foreign corporation in all states except for the state where it is incorporated. If a corporation is transacting business in a state other than where it was incorporated, it may be required to register for a certificate of authority to transact business (also called foreign qualification) in the other state. If a corporation is transacting business and fails to register as a foreign corporation, it may lose access to that state's courts and face tax fines and penalties.

A foreign corporation that registers for a certificate of authority in another state must pay state filing fees for the qualification filing; these fees are typically more expensive than the cost of filing for a domestic corporation. Also, foreign qualified corporations are subject to taxes and annual report fees from both the state of incorporation and the qualifying state. Thus, the actual advantage of incorporating in a state with very low initial filing fees and low corporate income tax is not as great as it appears if your business must still qualify to do business in its state of operations.

The definition of "transacting business" depends on the state and the situation. Consult your attorney to determine how the law applies to your situation. In general, though, some factors that a state considers when determining whether a corporation is transacting business in a state include:

1. Does the corporation have a physical presence in the state?
2. Does the corporation have employees in the state?
3. Does the corporation accept orders in the state?
4. Does the corporation have a bank account in the state?

Note that simply transacting business via mail order or the Internet typically does not equal transacting business; however, the determination is made on a case-by-case basis. Again, consult your attorney for specifics, as this list is not intended to be comprehensive.

Rick Oster is co-founder and vice president of Business Filings Inc., an online incorporation service provider that helps small-business owners and entrepreneurs form corporations, LLCs and nonprofits in any state.

The opinions expressed in this column are those of the author, not of Entrepreneur.com. All answers are intended to be general in nature, without regard to specific geographical areas or circumstances, and should only be relied upon after consulting an appropriate expert, such as an attorney or accountant.