What Is a Principal Place of Business?
A company's principal place of business is the primary location where its business is performed. This is generally where the business's books and records are kept and is often where the head of the firm and other senior management personnel are located.
Corporations are usually required to report their principal place of business to the US Secretary of State.
- A principal place of business refers to the main location in which a company conducts the bulk of its business.
- The US Secretary of State generally requires companies to list their principal place of business on their incorporation documents.
- Certain tax deductions may be afforded to solo practitioners who use sections of their homes as their principal places of business.
Understanding Principal Places of Business
The principal place of business plays a role not only in taxes but also in litigation. Where a company is based can affect legal jurisdiction and determine which court will hear legal matters involving the company.
If a plaintiff lives in a different state than that of a defendant who happens to be a business, and the plaintiff brings a lawsuit against the defendant, then there is a phenomenon known as "diversity of citizenship," which could determine the exact courthouses in which the lawsuit may be filed.
In a litigation event, if there is a diversity of citizenship, and the dollar figure in dispute rises above a certain threshold, then the case might be filed in Federal court as opposed to state court.
What Principal Place of Business Means to Courts
The United States Supreme Court has defined the principal place of business as the place where a corporation's officers direct, control, and coordinate the company's activities. This is also described as the company's nerve center, where the primary functions and decision-making activities of the enterprise occur. Under normal circumstances, this is also the location where the headquarters of a company is situated.
However, this might not be the case if the headquarters is largely an office that's strictly dedicated to board meetings for officers and directors of the company, while a remote location serves as the epicenter for control, direction, and coordination of the company's operations.
Depending on the type of business, transactions and operations that are integral to the company may be conducted at the principal place of business. For example, a single-store retailer's principal place of business would be the store where they sell products, train and manage staff, maintain inventory, and run an office to oversee the operation. A dentist could list their office where they perform exams and treat patients as their principal place of business. The garage where a mechanic services vehicles and maintains tools and parts also qualifies for this designation.
One's Home as Principal Place of Business
There are several criteria that have to be met for taxpayers to say their home is their place of business. The criteria below must be met for this to be true:
- The designated place of business within the home must be used exclusively and regularly for the performance and administration of the taxpayer's business.
- There can be no other location where the taxpayer substantially performs these operations.
- It cannot be a separate structure not attached to the primary home on the same property.
- It cannot be used as a warehouse for storing inventory sold elsewhere.
- It cannot be a rental unit.
- It cannot be a daycare facility.
For solo practitioners who use part of their homes as their principal place of business, certain tax deductions are permitted. This can include portions of rent or mortgage payments and a percentage of utility costs that reflect the scope of the area dedicated to business usage.