All corporations are considered a domestic corporation in the state where the corporation is formed. For example, a corporation formed under South Carolina law is considered a domestic corporation in South Carolina. This same corporation would be considered a foreign corporation in all other states. A business owner can choose in which state to domesticate his corporation.
Forming a Domestic Corporation
Corporations are formed under state law. The basic requirements include filing the appropriate form -- usually called the articles of incorporation -- with the proper state agency -- usually the secretary of state. Complying with these requirements forms a domestic corporation under that state's law. The conduct of the corporation's internal affairs, such as election of officers and directors, will be subject to the state law where it was formed, regardless of where the corporation may be conducting its business.
Domesticating a Foreign Corporation
An existing corporation that wants to conduct business in a state other than where it was formed must qualify to do business as a foreign corporation in that state. The requirements for qualifications are similar to forming the corporation -- the appropriate form must be filed with the proper state agency. The corporation also has the option of domesticating in that state, rather than operating as a foreign corporation. The requirements for domesticating the corporation include, not only filing appropriate forms for domestication, but dissolving or ceasing existence in the state where the corporation was originally formed.
A business owner deciding where to domesticate his corporation will generally consider the advantages the corporate laws of a certain state may have for the corporation and its shareholders. For example, corporations are frequently domesticated in Delaware because of its unique court system, called the Court of Chancery, that handles corporate disputes among shareholders. In this situation, a corporation domesticated under Delaware law will have to qualify as a foreign corporation in all other states where it conducts business.
In the absence of compelling legal reasons, domesticating a corporation in a state with a lower corporate tax rate than the one in which the business is located is generally of little value. Under federal law a state can tax all income derived within its borders. So a business located in a state with a high corporate tax rate would gain no benefit from incorporating in a state with little or no corporate tax, if the company derived all its income within its home state.