There May Be Benefits to Incorporating in Foreign States…
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 hype about incorporating in certain states that happen to be well-known for having favorable laws for corporations. When an entity elects to incorporate outside its “home” state, the most common states in which the entities incorporate include Delaware and Nevada. However, even taking account of favorable laws in certain states, an entity’s “home” state (i.e., the state in which the corporation conducts a majority of its business) may 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 corporate formation process.
Incorporating in Delaware is generally less expensive than most other states. The initial charge for incorporating in Delaware 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 continuing operations is low as well. There is no Delaware corporate income tax for corporations that are formed in Delaware so long as they do not transact business in Delaware.
Another benefit of Delaware incorporation is Delaware’s extensive and often easily interpretable law. Delaware has a separate Court of Chancery (a business court) that does not use juries, but instead utilizes merit-based (not elected) judges. Because there are no juries, decisions from the Chancery Court are issued as written opinions, and as such, Delaware has a large body of written legal precedent to rely upon.
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 the formation of a sole proprietorship or a partnership, but also provides a layer of protection (the corporate shield) as a limitation of liability. Unlike regular LLCs, Delaware’s “Serial” LLC allows different lines of business to be treated separately from each other from a liability standpoint.
Incorporate a Business or Form a Limited Liability Company in the State of Delaware.
Come tax time next year, you’ll be glad you did!
What about Nevada?
Nevada began with corporate statutes based on Delaware, and went further to establish a corporate structure that allows investors and owners of Nevada corporations to remain completely private. The Supreme Court of Nevada has consistently taken a very strong stand in the protection of corporate privacy, even when a corporation fails to adhere to basic corporate formalities.
Since the implementation of these privacy statutes in 1991, the number of new incorporations in Nevada has exploded. Unlike most other states, Nevada does not require corporate stockowners to disclose their information. In fact, the information is not kept on file with the state.
Additionally, to ensure privacy, Nevada allows its corporations to use bearer stock certificates, which make it virtually impossible to prove the ownership of a Nevada corporation. Accordingly, owners or investors utilizing bearer shares can have complete control and ownership while remaining anonymous.
Nevada also does not tax the income of its corporations or its state’s citizens. 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 tax time next year, you’ll be glad you did!
Incorporating in Your Home State May be BEST!
For most small businesses, however, it may still be best to incorporate in the state where your business is based. Many legal and business professionals advise that you incorporate in the state in which your corporation intends to conduct the majority 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 to be “corporation friendly,” but then conduct business outside your state of incorporation, you will likely have to qualify to do business in the state in which you are conducting business. Qualifying to do business outside your state of incorporation is called “foreign qualifying” or “foreign qualification.” Qualifying as a foreign corporation involves: (1) filing the appropriate foreign qualification documentation with the relevant Secretary of State; and (2) paying additional filing and maintenance fees. For some entities it may be worth the additional time and money associated with foreign qualification, but for many corporations, it simply creates an additional, unnecessary headache.
When determining the appropriate state of incorporation, you should undertake the following considerations:
- What are the tax implications/benefits of incorporating outside your home state vs. incorporating inside your home state?
- What are the additional costs of incorporating outside your home state and where, if anywhere, must you foreign qualify?
- Are the corporate laws in one state favorable to the type of business entity you are forming, and how do they affect the obligations of the principals and/or shareholders of the corporation?
Even though some factors favor incorporating 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 incorporating out of state before making your final decision.
Incorporate a Business or Form a Limited Liability Company in your home state.
Come tax time next year, you’ll be glad you did!
startupattorney said,
March 7, 2008 @ 10:34 pm
Great post! The determination of where to file a business entity naturally relates to the idea that in today’s global economy you can start a business almost anywhere. A lot of companies are moving their businesses to other states because of the distinct advantages those states offer. The advantages of these states is not necessarily always legal in nature and may be derived from a strong economic base. As such below is a helpful list of 10 places a new business owner may consider starting and running their business and each location’s distinct advantages.
New Jersey
New Jersey is a great state to form a corporation or LLC. With New Jersey conveniently located between New York, Pennsylvania and Delaware, it’s no wonder Forbes and CNBC ranked New Jersey in the top twenty states for business. New Jersey also has a top ranking education system, it ranks fifth in college attainment, and is fifteenth with regards to PhDs per square mile. In addition, the state provides a wealth of practical information and tools to serve the needs of the business community. With all of these benefits, why wouldn’t you want to incorporate in New Jersey?
Florida
Florida provides outstanding opportunities for a new business. Florida boasts the fourth largest population in the country, a large tourism industry, and large export industry (40% of all U.S. exports to Latin and South America pass through Florida). Another advantage for a new business in Florida is that there is no personal state income tax, so if you make an S Corp election, there will be no state income tax on your personal salary from the corporation. Florida also provides tax incentives for certain industries in the state. With all of these benefits, it is apparent that Florida isn’t just sunshine and beaches for an entrepreneur looking to start a new business.
New York
With a Gross State Product of about $822 billion a year, New York State provides the eleventh largest economy in the world to new business owners. Other business owners agree that New York is an ideal place to start a business – New York ranks fourth in the nation in attracting new and expanded corporate facilities according to the March 2005 issue of Site Selection Magazine. New York is also ranked number one in the nation for the number of Fortune 500 company’s headquarters at 54, according to Fortune Magazine, 2005. New York State has a great education system and is ranked first in the nation in number of first tier universities, according to Entrepreneur Magazine, 2004. With such a strong economic base, expanding economy, and availability of talent, it’s no wonder approximately 125,000 corporations and LLCs were formed in 2006 in the state of New York.
Texas
With a Gross State Product of about $1,096 billion a year, Texas provides the eighth largest economy in the world to new business owners. In 2006, Texas led the nation with the largest employment gain for nonfarm employment of 213,200, according to the U.S. Bureau of Labor Statistics. Also, as of July 1, 2006, Texas had gained 2.7 million people since 2000 and Texas’ population grew at a rate of 12.7 percent. With such a robust economy and rapid growth, Texas provides a perfect environment for the formation of a new business entity.
Utah
Utah provides excellent opportunities for a business looking for a good place to form a business. Utah ranked as the top state for “The degree to which state economies are knowledge-based, globalized, entrepreneurial, information technology-driven and innovation-based” according to the 2007 State New Economy Index. Utah’s job growth has been triple the national average at 4% in 2007. Utah also ranks third in the nation for new population growth. Utah offers excellent prospects for any business owner looking for an entrepreneurial environment to grow a new business.
Maryland
Maryland’s close location to Washington D.C. and major port city of Baltimore (8th largest port city in the country) makes it a great place to start a business. Not to mention the fact that Maryland is now the wealthiest state in the U.S. with a median household income of $65,000 according the 2007 Census report. Maryland also has a very robust biotech industry and transportation industry. Maryland provides a lot of opportunities for new business owners looking to form a new entity.
Michigan
Michigan provides a very attractive place to start a new business. According to the Council on State Taxation, Michigan’s local business taxes are below the national average and now in 2008 those taxes have dropped even more for 7 out of 10 businesses. Michigan also provides several tax credits, abatements, and corporate incentives for Michigan businesses. Michigan also has a great quality of life, an outstanding education system, and a well established infrastructure to help your business grow.
Illinois
Illinois has a lot to offer someone forming a new business. From Chicago to rural southern Illinois to all the mid-sized communities located throughout the state, Illinois offers a variety of regions to choose from with your business. Illinois has one of the most productive and well-educated work forces in the country. Additionally, Illinois provides a variety of incentive programs to business owners within the state.
California
With the largest population of any state (36.8 million) and three of the top fifteen largest cities in the US (Los Angeles, San Diego, and San Francisco) it’s no wonder that California had an estimated 3,675,000 small businesses in 2006. California’s strong and diverse economic base has made it the sixth largest economy in the world with $1.54 trillion in goods and services produced in 2004. Creating a business in California generates ample opportunities to shine with leading entertainment and tech industries, a highly skilled labor force, and ample investment capital (California receives over 45% of all venture capital dollars invested in the U.S.). Not to mention California is a great place to live with over 1000 golf courses, 45 snow resorts, 21 professional sports teams, and more theme parks than any other state. California is by far one of the best states to build and grow a business.
North Carolina
North Carolina provides a lot of attractive incentives for new business formations. According to an Ernst & Young report, North Carolina has one of the nation’s lowest effective business tax rates. It is also conveniently located within a 700-mile radius of more than 170 million U.S. and Canadian consumers. The cost of doing business in North Carolina is also low with construction costs, electric rates, and cost of living all lower than the national average. The government in North Carolina is also very supportive to business growth; for example, the Department of Commerce routinely provides support for businesses. In addition, companies that meet certain criteria may be eligible for tax credits, sales and use tax discounts, exemptions and refunds, and other programs. North Carolina’s business friendly environment is very attractive for new business owners looking to form an entity.