Where To Incorporate Your Business
By Aaron Larson
Law Offices of Aaron Larson
August, 2004; Last Reviewed Dec., 2010
Contents
Most businesses do not need to give much consideration to where they incorporate. They simply incorporate in the state in which they are doing business. But that may not be the right choice for you.
Corporations that do business in more than one state, or corporations that may eventually "go public", may wish to consider the benefits of incorporating in a state with more favorable corporate laws than the state in which they are headquartered.
A corporation that is incorporated in the laws of one state, but does business within another state, is considered to be a "foreign corporation" in that second state. Corporations must register to do business in each state in which they operate, and there are filing requirements and fees associated with registration.
Initial Considerations
When deciding if it will be beneficial to incorporate in another state, factors to consider include:
Tax Rates - What is the tax rate in your home state, as compared to the tax rate in the state in which you might instead opt to incorporate?
Costs & Fees - What are the costs and annual fees associated with incorporating in the other state, as compared to the costs and fees in your home state? If you will be doing business in more than one state, including the state in which you incorporated, what will be the cost of registering your corporation to do business in the other states?
Insolvency - If your corporation becomes insolvent, how are creditors treated under the laws of each state?
Simplicity - If you conduct business in only one state, it is almost always cheaper and easier to incorporate in that state. You also won't automatically be subject to litigation in the courts of a state in which you do not conduct business, by virtue of having incorporated in that state.
Delaware Corporations
Delaware is considered to have some of the most favorable corporate laws in the nation. Almost half of all corporations listed on the New York Stock Exchange are incorporated in Delaware, and it is a popular state for the incorporation of businesses which intend to eventually go public. Delaware is also a good choice for the incorporation of a business that has offices or operations in multiple states. Delaware's courts, legislature, and government are considered to be very responsive to the needs and interests of corporations.
Benefits of incorporating in Delaware include:
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Low incorporation fees, and a low annual franchise tax;
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Businesses do not have to identify or provide addresses for their initial board of directors on their articles of incorporation;
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All corporate offices may be held by a single person;
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Businesses which incorporate in Delaware but do not conduct business in the state are not required to pay Delaware's state corporate income tax;
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For shareholders who are not residents of the State of Delaware, their shares of stock are not subject to either Delaware's personal income tax or its state inheritance tax;
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Delaware maintains a separate court system, its "Court of Chancery", for businesses;
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It is fast and easy to form a corporation.
A Delaware corporation must have a registered agent within the State of Delaware, but need not have any other offices or operations within the state.
Nevada Corporations
Nevada is also considered to have laws which are favorable to corporations.
Benefits of incorporating in Nevada include:
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Shareholders can avoid having their identities being disclosed in the corporation's public records;
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Shareholders, officers and directors may be nonresidents of Nevada.;
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All corporate offices may be held by a single person;
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There is no state annual franchise tax, and no state corporate tax on profits;
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There is no state personal income tax;
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It is fast and easy to form a corporation.
A Nevada corporation must have a legal address and registered agent within the State of Nevada.
Given that most corporations don't go public and most corporations stand to get little tax benefit from incorporating in another state, and may in fact incur additional costs and paperwork obligations as a result of incorporating in a state other than where they actually do business, it often makes little sense to fret over where you incorporate. If your business proves to be a hot commodity and you find yourself looking at angel investors or venture capitalists who hope to invest and eventually take your corporation public, if necessary they'll help you re-incorporate in another state.
Copyright © 2004 - 2011 Aaron Larson. All rights reserved. No portion of this article may be reproduced without the express written permission of the copyright holder. If you believe you may lawfully use a quotation, excerpt or paraphrase of this article under the Fair Use exception to copyright law, except as otherwise authorized by the author of the article, you must cite this article as a source for your work and include a link back to the original article from any online materials that incorporate or are derived from the content of this article.