One of the most common questions for entities wishing to incorporate is: “Where should I incorporate?” In fact, an entity can choose from any of the 50 states or the District of Columbia. There has been a great deal of publicity about incorporation in certain states that happen to be well known for having favorable laws for corporations. When an entity chooses to incorporate outside of its “home” state, the most common states in which entities incorporate include Delaware and Nevada. However, even allowing for favorable laws in certain states, an entity’s “home” state (i.e., the state in which the corporation conducts most of its business) can often be the best state to incorporate. .
Due in large part to their liberal incorporation laws and favorable tax policies, the most “incorporation-friendly” states are Delaware and Nevada. And here’s why…
Should I incorporate in Delaware?
Delaware’s advantages as a place of incorporation range from the Delaware General Corporation Law to the flexibility built into the company formation process.
Incorporating in Delaware is generally less expensive than most other states. The initial Delaware incorporation fee can be as low as $89.00; the annual franchise tax can be as low as $65.00 in many cases; and the cost of ongoing operations is also low. There is no Delaware corporate income tax for corporations that are formed in Delaware, as long as they do not transact business in Delaware.
Another benefit of incorporating Delaware is Delaware’s extensive and often easily interpretable law. Delaware has a separate Court of Chancery (a commercial court) that does not use juries, but rather merit-based (non-elected) judges. Because there are no juries, Chancery Court decisions are rendered as written opinions, and as such, Delaware has a wealth of written legal precedent to rely on.
Delaware law also allows for a version of the Limited Liability Company called a Serial LLC. Traditionally, an LLC is relatively simple to form and maintain. It is similar to forming a sole proprietorship or partnership, but it also provides a layer of protection (the corporate shield) as a limitation of liability. Unlike regular LLCs, the Delaware “serial” LLC allows different lines of business to be treated separately from a liability standpoint.
Incorporate a business or form a limited liability company in the state of Delaware.
Come at tax time next year, you’ll be glad you did!
What about Nevada?
Nevada started with Delaware-based corporate statutes and went further by establishing a corporate structure that allows investors and owners of Nevada corporations to remain completely private. The Nevada Supreme Court has always taken a very strong position in protecting corporate privacy, even when a corporation fails to follow basic corporate formalities.
Since the implementation of these privacy statutes in 1991, the number of new incorporations in Nevada has skyrocketed. Unlike most other states, Nevada does not require corporate shareholders to disclose their information. In fact, the information is not kept in the state files.
Also, to ensure privacy, Nevada allows its corporations to use bearer share certificates, making it virtually impossible to prove ownership of a Nevada corporation. Consequently, owners or investors using bearer shares can have complete ownership and control while remaining anonymous.
Nevada also does not tax the income of its corporations or the citizens of its state. A Nevada corporation is also not subject to any other hidden taxes, such as franchise taxes, capital stock taxes, or inventory taxes. Sales tax applies only to products sold within the state.
Incorporate a business or form a limited liability company in the state of Nevada.
Come at tax time next year, you’ll be glad you did!
Incorporating in your home state may be the BEST!
However, for most small businesses, it may still be best to incorporate in the state where your business is located. Many legal and business professionals advise that you incorporate in the state in which your corporation intends to do most of its business, and if you intend to do business in only one state, you should incorporate in that state.
If you incorporate in a state that is traditionally considered “corporate friendly” but then conduct business outside of your state of incorporation, you may need to qualify to do business in the state in which you are conducting business. Qualification to do business outside of your state of incorporation is called “foreign qualification” or “foreign qualification.” Qualifying as a foreign corporation involves: (1) filing the appropriate foreign qualification documentation with the appropriate Secretary of State; and (2) pay additional filing and maintenance fees. For some entities it may be worth the additional time and money associated with foreign rating, but for many corporations, it simply creates an additional and unnecessary headache.
When determining the appropriate status of incorporation, you should make the following considerations:
1. What are the tax implications/benefits of incorporating outside of your home state vs. incorporating within your home state?
2. What are the additional costs of incorporating outside of your home state and where, if anywhere, must you qualify as a foreign national?
3. Are the corporate laws in a state favorable to the type of business entity you are forming and how do they affect the obligations of the directors and/or shareholders of the corporation?
Although some factors favor incorporation in the “friendly” states of Delaware or Nevada, it can be more expensive and more complicated to incorporate out of state. For this reason, it is important to consult with your attorney or accountant about the advantages and disadvantages of incorporating out of state before making your final decision.