Entity formation involves choosing a jurisdiction, and the default answer of the
home state is right for most businesses and wrong for some.
Home state. Simplest and cheapest for a business operating in one state,
avoiding a second set of filings and franchise taxes. Where a business operates
only in its home state, organizing elsewhere means qualifying as a foreign
entity at home and paying twice.
Jurisdictions chosen for their law. Well-developed corporate case law,
specialized business courts, predictable outcomes, and statutes that permit
extensive contractual customization. Institutional investors frequently require
it, and that requirement is the most common reason.
Internal affairs doctrine. The law of the state of organization governs the
relationships among the entity, its owners and its managers, regardless of where
the business operates — which is what makes the choice meaningful.
Attempts to override it. Some states apply their own law to entities with
substantial local contacts, and the effectiveness of those provisions is
contested.
Cost. Franchise taxes vary by orders of magnitude and should be modelled at
the expected size.
Conversion and redomestication are available in most states, so the choice
is not permanent, though it may be taxable.
