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Choice of Entity: State of Incorporation Decision
Once you have decided on the form of entity, the next important question is in which state should your start-up corporation be formed.
Because of the "internal affairs doctrine" this turns out to be more than simply a trivial question. The internal affairs doctrine is a conflict of laws principle which recognizes that only one State should have the authority to regulate a corporation's internal affairs — matters peculiar to the relationships among or between the corporation and its current officers, directors, and shareholders. Relationships external to the corporation, like contracts, torts, tax, etc. are governed by the laws of the jurisdiction where the activity occurs.
Given the seeming importance, you might be surprised to learn that the incorporation decision is bimodal for most corporations. Corporations tend to incorporate in the state where they are headquartered or in Delaware. There are lots of convenience-related reasons why this is so. However, it may not always be the correct decision for founders.
The following Massachusetts and California cases raise some issues that are important to consider as one advises a founder on the selection of a state of incorporation.
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