Every company needs a headquarters: a place where management gathers and makes big decisions and where the beating heart of the business runs constantly. However, many small businesses that don’t have fancy corporate offices have difficulty establishing their principal place of business, especially if most of their business hours are conducted away from a board room.
What exactly constitutes a principal place of business, and do you even need to identify one for your small business? Let’s answer both of these questions in detail now.
What is a Principal Place of Business?
A principal place of business is, simply put, the primary or main location where a business does its business. Sounds simple enough, right?
More specifically, a principal place of business is the place where:
The business keeps its books and records
Senior management officers or personnel are typically located
Most of the high-level business decisions are made
The majority of the business is performed
However, things can get a little tricky when it comes to businesses with multiple locations or outlets. For example, McDonald’s principal place of business can’t be any single store. But is it the corporate headquarters when, presumably, fast food isn’t made at that location?
What Really Qualifies as a Principal Place of Business?
To help solve this conundrum, we can look at a 2010 Supreme Court ruling. During the case of Hertz Corp v. Friend, the Supreme Court issued a unanimous opinion that helps to clarify what exactly qualifies as a principal place of business.
The Court concluded that a "principal place of business is best read as referring to the place where a corporation's officers direct, control, and coordinate the corporation's activities. It is the place that Courts of Appeals have called the corporation's nerve center. And in practice it should normally be the place where the corporation maintains its headquarters provided that the headquarters is the actual center of direction, control, and coordination".
The Court further went on to state that the so-called nerve center was not, “simply an office where the corporation holds its board meetings”.
In other words, the principal place of business for an organization must be the place where most of its real high-level work is performed. A basic office where a Board of Directors meets once a month does not qualify.
Here’s an example: say that you run a restaurant business with a few stores in your chain. Your principal place of business won’t be any of your subsidiary restaurants but will instead be the primary or chief restaurant where you and your store managers gather regularly to plan out scheduling and other decisions.
Furthermore, such a restaurant is also a principal place of business since it’s where the rest of your restaurants all get their menus, themes, and so on.
Another example: say that you have a business that sells clothing. Any individual clothes store will not qualify as a principal place of business. Instead, your principal place of business is your headquarters where you design clothes, come up with marketing campaigns, meet with your Board of Directors, and perform other high-level activities. Even if you don't sell clothing specifically at that location, it’s still your principal place of business.
Why is a Principal Place of Business Important?
It’s important for any business owner to know their principal place of business primarily for tax reasons.
For starters, you may be able to benefit from certain tax deductions if you identify and claim your principal place of business. Deductions are applicable for various types of business expenses.
Your principal place of business may affect your overall business type. Your business type, in turn, also affects the kinds of business taxes you are required to pay.
When writing a business proposal, you’ll need to state where your principal place of business is.
Lastly, your principal place of business could affect what legal jurisdiction your company falls under, as well as what types of courts will hear any legal matters that concern your company.
Principal Place of Business Tax Benefits
Let’s take a look at some of the tax benefits you might get from identifying your principal place of business in more detail.
Typically, you’re able to deduct any expenses that you incur to maintain the locations of your business. This applies regardless of whether you own or rent your property.
Say that you operate three retail stores for your business in total. That means you’ll be able to deduct the costs to maintain all three stores. Naturally, these costs can include part of mortgage payments, utilities, supplies, maintenance, repairs, and more.
If you work out of your own home, you might also be able to deduct certain costs to maintain your home if and only if your home is your principal place of business.
IRS Publication 587 says that you can deduct various expenses in your home if you meet a few qualifications:
The activities carried out at home must be of significant importance
You must spend lots of work time at home
You must use part of your home exclusively and regularly for business management and administration
You must not have another fixed location for management and administration
Put in layman’s terms, this means that you can’t do your books or come up with business plans from the comfort of your couch. You need to have a home office, desk, or another separate space in which you do all of your business and administrative activities.
Granted, the IRS can’t exactly look into your home and prove that you didn’t do your books on the couch. But you may need to provide evidence such as photographs or similar items if you’re ever audited, so it’s best to be truthful in this regard.
Even beyond your home expenses (such as utility bills or a portion of your mortgage), you can also deduct certain items for home supplies, computers, or even software – so long, that is, as you can state truthfully that your home office is your principal place of business, at least for management and administration concerns.
Deductions on the Road
What if your principal place of business is technically on the road? Many entrepreneurs and freelancers travel frequently, so their principal place of business might fluctuate between hotel rooms, hostels, and even their own cars.
The IRS requires similar qualifications in order for you to count your car or even your traveling business as a “principal place of business”. This takes a lot of effort, naturally, but it can usually be established once you’ve been on the road for some months and have a paper trail to back it up.
Determining Tax Payments
By establishing your principal place of business, you may be able to alter what types of taxes you are required to pay. For instance, your principal place of business affects how much income tax you must pay in your state.
For example, you might be able to make deductions on all retail or outlet stores in your business chain if your principal place of business is at a location besides those stores. You may also be able to alter your income tax levels as a result.
Do You Need To Know Your Principal Place of Business?
All in all, yes. Knowing your principal place of business is simply too important both for legal issues and for the tax benefits you might enjoy. Who doesn’t want to save more money on taxes?
Aside from this, knowing your principal place of business may help you to better organize your management and administrative duties. If you’re using one restaurant out of your entire chain as your nerve center, you might consider moving into an office space as you scale or changing your work schedule.Furthermore, it's important to know where your principal place of business is in the event that you ever need to go to court. For instance, if a case plaintiff lives in a separate state from the defendant and the defendant is a business, then "diversity of citizenship" might apply. This could make it tricky to figure out which courthouses any future lawsuits might need to be filed with.
Now, as a business owner, if it comes to this, you may want to look for a legal advice from some of the best formation services and registered agent services out there. Here are some of the most relevant:
Proven Business Formation Services
Swyft Filings is a reliable company that offers budget-friendly payment packages that come with amazing features. Despite only doing business since 2015, their 100% positive reviews are speaking for themselves.This is a proven company to have in mind when you want to designate a registered agent service for your business.
With an A+ rating with the BBB, BizFilings is a trusted online formation service. Their BizComply tool keeps track of any important filing dates and deadlines. BizFilings will take you through the whole process with their on-going support.
When compared to other formation services, SunDoc Filings provides volume discounts for multiple states and entities and equally amazing customer support. However, its basic package misses some important features and registered agent service fees are a bit higher than its competition's.
If you are looking for cheaper services then Inc Authority could be the one for you. Service that make Inc Authority stand out from the rest is tax planning consultation. Taxes are a vital aspect of the business, and you should ensure you comply.
If you want to use a service with amazing customer report, MyCorporation may be the best choice. It is also perfect if you want an annual report service. On the other hand, you may want to hire competition that offer registered agent service in their packages at a lower price.
In the end, determining and sticking with a principal place of business is one of the smartest things you can do as your enterprise grows and evolves. It’s particularly important as your business gets bigger and you add new locations or stores under your belt.
Figuring out where your headquarters is located and where it might move in the future can help you grow your business beyond its younger stages, too.
Check out our other guides to help you grow your business, or get in touch for help securing prime business loans and funding!