The small business owner can form a corporation or limited liability company (LLC) (the most likely entity choices) in any state, even in a state in which he conducts no business activities. Further, even when an out-of-state entity is created, there is no requirement that any assets be located in that state.

So clearly, on a basic level, you have two options: form the entity in your home state or form the business in another state. There are advantages and disadvantages to either option, and among the considerations are complexity of administration, fees and costs.

But from an asset protection standpoint, you'll also want to consider the benefits of forming and registering in a state known as friendly to business ownership. Any additional expenditure of time and money may be inexpensive compared to the unique protections some states offer.