One of the most common questions for entities wishing to merge is – “Where should I join?” In fact, an entity may choose one of the 50 states or the District of Columbia. There’s a lot of hype about incorporation in certain states that happen to be notorious for having laws that favor corporations. When an entity elects to incorporate outside its “home” state, the most common states in which the entity is incorporated include Delaware and Nevada. However, even considering favorable laws in certain states, the entity’s “home” state (that is, the state in which the company conducts most of its business) is often the best state to incorporate.
Due to mostly liberal incorporation laws and favorable tax policies, the most “incorporation-friendly” states are Delaware and Nevada. And here’s the reason…
Should I enter in Delaware?
The advantages of Delaware as a place of incorporation range from Delaware General Company Law to the flexibility built into the company formation process.
Entering in Delaware is generally cheaper than most other states. The initial fee to join Delaware can be as low as $89.00; the annual franchise tax can be as low as $65.00 in most cases; and ongoing operating costs are also low. There is no Delaware corporate income tax for companies formed in Delaware as long as they do not do business in Delaware.
Another benefit of incorporating Delaware is that Delaware’s laws are broad and often easy to interpret. Delaware has a separate Court of Chancery (business court) that does not use a jury, but uses judges based on merit (not elected). Because there is no jury, decisions from Chancery Court are issued as written opinions, and as such, Delaware has many reliable written legal precedents.
Delaware law also permits a Limited Liability Company version called Serial LLC. Traditionally, LLCs have been relatively simple to form and maintain. This is similar to the formation of a sole proprietorship or partnership, but also provides a layer of protection (corporate shield) as a limitation of liability. Unlike a typical LLC, a Delaware “Serial” LLC allows different lines of business to be treated separately from each other from a liability standpoint.
Incorporating Business or Forming a Limited Liability Company in the State of Delaware.
Come tax time next year, you’ll love it!
What about Nevada?
Nevada started with company laws based on Delaware, and went further to build a corporate structure that allowed investors and Nevada company owners to remain completely private. The Nevada Supreme Court has consistently taken a very strong stance on protecting corporate privacy, even when a company fails to comply with basic corporate formalities.
Since the adoption of these privacy laws in 1991, the number of new establishments in Nevada has exploded. Unlike most other states, Nevada does not require company shareholders to disclose their information. In fact, the information is not stored in the state archives.
Additionally, to ensure privacy, Nevada allows its companies to use bearer share certificates, which makes it nearly impossible to prove ownership of a Nevada company. Thus, the owner or investor who uses the bearer shares can have full control and ownership by remaining anonymous.
Nevada also does not tax the income of its corporations or citizens. Nevada corporations are also not subject to other hidden taxes such as franchise taxes, share capital taxes, or inventory taxes. Sales tax only applies to products sold in the state.
Incorporating Businesses or Forming Limited Liability Companies in the State of Nevada.
Come tax time next year, you’ll love it!
Entering in Your Home Country is Probably BEST!
However, for most small businesses, it may still be better to incorporate in the country where your business is located. Many legal and business professionals recommend that you incorporate in a state where your company intends to do most of its business, and, if you intend to do business in only one state, you must incorporate in that state.
If you’re incorporating in a state that’s traditionally considered “company friendly,” but then do business outside your state, you’re more likely to be eligible to do business in the state where you do business. Qualifications to do business outside your state are called “foreign qualifications” or “foreign qualifications”. Qualification as a foreign company involves: (1) submission of appropriate foreign qualification documentation with the relevant Secretary of State; and (2) pay additional filing and maintenance fees. For some entities it may be worth the extra time and money associated with foreign qualifications, but for many, it just creates unnecessary additional headaches.
When determining the appropriate status of incorporation, you should take the following considerations into account:
1. What are the tax implications/benefits of incorporating outside your state vs. join within your home state?
2. How much does it cost to join outside your home state and where, if any, do you have to qualify as a foreigner?
3. Do corporate laws in one state benefit the type of business entity you form, and how do they affect the obligations of the principal and/or shareholders of the corporation?
While several factors favor incorporation in the “friendly” states of Delaware or Nevada, it may 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 pros and cons of an out-of-state establishment before making your final decision.