Okay, you have made the decision to go ahead and incorporate to protect yourself. The next question is often what is the best state to incorporate in? It is almost always the one in which you are actually running the business.

Best State to Incorporate
One of the most misunderstood elements of business law is jurisdiction. Jurisdiction simply refers to the issue of what laws control a particular situation. Actually, a better way to put it is whose laws control? In many business law niches, state laws are the guiding light, not federal law. The formation of business entities is one such place.What is the best state to incorporate in? In most situations, it is the state you will be conducting the business in. Remember, state law is controlling here. Nearly all states view businesses being run within their borders as falling under their jurisdiction. This means you are required to comply with the laws of the state. You are also required to pay taxes and fees the state requires for the running of your business.
Ah, but what about Delaware and Nevada? For those new to the process, Nevada is touted as a great place to form your business entity. The state has very minor taxes, so many trump it as the best state to incorporate. There is, however, one problem. If you incorporate in Nevada, but run your business out of an office in your state, you are almost always violating the laws of your state. When tax agencies and regulatory groups look at business entities, the state of incorporation is not the issue. Instead, the issue is where is the business actually being conducted. If you incorporate your business in Nevada, but run it out of Los Angeles, you could be in big trouble. California will eventually figure it out. When they do, you will be penalized and assessed back taxes. It is an ugly situation.

There is one way around this situation. It involves a double incorporation strategy. Essentially, you incorporate one business in Nevada and one in your state. The Nevada entity runs the basic business. The entity in your state then manages the Nevada entity for a fee. This may sound great at first glance, but it is an expensive option. Make sure you talk with an attorney before going down this road.

Why Delaware?

There are sound reasons to incorporate in Delaware.  Delaware law is well-settled, generally business friendly and most lawyers in the U.S. are adapt at dealing with DE law.  The second point is perhaps the most important point initially, but it's the first point that makes you choose Delaware over another state that is as business friendly. Because Delaware has a well-established body of law, you're not going to pay to litigate those "basic" issues, where you might in a state like North Dakota which may have adopted business-friendly laws but doesn't have the precedent to draw upon.
The last point is important too, but it goes beyond lawyers being "adept" with Delaware law. After incorporation, when the company does any deal that requires legal opinion, part of the opinion will require the lawyer to validate corporate structure (i.e., "Due incorporation and valid existence"). If you're incorporated in New York or California for example or practically any other state, only a lawyer admitted to that state can make that opinion. If you're in Delaware, every lawyer can opine even if they're not admitted in Delaware.

If you ever want to go public, the bankers may require moving your business here before the public offering.

Why Nevada?

Nevada does not have a franchise tax.
The annual cost to maintain your corporation with 25,000 shares in Good Standing in Nevada is the modest sum of $125. This is the fee for filing your annual list of officers and designation of registered agent. For a similar Delaware corporation, the annual franchise tax is $190. There is also a fee of $20 to file the annual report. There is, however, an alternative method for determining your franchise tax in Delaware, which involves reporting the number of issued shares and your total gross assets as reported on U.S. Form 1120, Schedule L (Federal Return). Discussing the calculations used to determine the franchise tax using this method is beyond the scope of this document, but let it be pointed out that submitting your gross assets and shares issued is one more thing Nevada does not ask you to do.

Delaware has an income tax, Nevada does not. While it is true that this 8.7% income tax applies only to corporations doing business in Delaware, it significantly reduces the possibility of reducing or eliminating your home state corporate income tax (because the strategy used to do this involves doing business in the preferred state -- in this case, Delaware). This means reporting, forms, red tape, etc., you do not need. Delaware also has a gross receipts tax which most businesses doing business in Delaware must pay. This tax ranges from 0.096% to 1.92%, depending on your type of business.
Nevada is the only state which does not share information with the Internal Revenue Service. Your Nevada Corporations information is completely private! The fact is, Nevada doesn't really ask for much information in the first place, so doesn't have much to share even if it wished.
Some states make a major item out of the fact they recognize S-Corporations. The status of a corporation as an S-Corporation really has no significance to the corporate owners if the state has no income tax. In Nevada, whether you have a Nevada S-Corporation or not really doesn't matter to the Nevada Department of Taxation since allocation of taxable income from corporations to the individual has no effect on the state's revenue.
With Nevada corporations, you do not have to divulge information such as the date appointed for the next annual meeting of the stockholders or directors.
When you Incorporate in Nevada you are not required to list places of business outside Nevada.
With Nevada Corporations, Nevada does not require notification of stock issued or stock transfers, names of stockholders, etc

Do Your Homework

In deciding which state is the best state in which to incorporate, several factors must be analyzed. What is a state's regulatory climate? What is a state's tax situation? What is a state's stance on individual privacy? Which state will allow you the greatest flexibility to run your business the way you see fit? Which state has the best body of statute? Which states offer the best business climate?