Many people have the preconceived notion that when incorporating their newly formed business they will derive some benefit from forming their business under Delaware law rather than that of their own state.
When it comes to incorporating, new business owners seem to think they know something others do not and want in on the mysterious benefits of incorporating in Delaware that only those “in-the-know” are aware of. The truth is, that although incorporating in Delaware makes sense for large, publicly held corporations, it usually does not for the general partnerships, corporations, and limited liability companies that most business owners are establishing. This is particularly so, since the smaller, privately held companies will primarily only be doing business in the state in which the owners, members or managers reside.
A business-owner is not necessarily going to save any money in taxes by incorporating in Delaware. For small businesses, it is likely your business makes money primarily from operations in the state in which you reside. Therefore, you will pay your own state’s income taxes on this income.
Furthermore, while it is true that Delaware generally has lower incorporation fees, there are other fees associated with incorporating in Delaware if you don’t actually plan on doing business there. Businesses must qualify to operate and do business in your state in addition to incorporating in Delaware. This prolongs the process and creates additional costs by having to file papers to operate as a “foreign” corporation in your home state. Companies incorporated in Delaware and doing business elsewhere must also appoint a corporate agent to receive official notices in Delaware. Though many companies and services operate as these corporate agents it does add additional cost. There are also additional expenses each year regarding tax returns and filings.
There are times when incorporation in a state other than your own can make sense. This is particularly so if you plan to expand rapidly into other states, take the company public or are looking to investors for capital outside of your home state. In those instances it may be beneficial, and many attorneys or accountants will recommend either Delaware or Nevada.
The advantages of incorporation in Delaware are that there are: lower incorporation and LLC formation fees; no state corporate income tax for companies operating outside Delaware; no minimum capital required for incorporation; one individual can hold all the corporate offices; shares owned by Delaware non-residents are not subject to Delaware personal income tax or inheritance tax; lower franchise fees; and the names of the initial directors need not appear in the public records. Delaware also has a greater scope of corporate-themed legal authority should litigation arise involving your business.
Nevada is another state known to have similar benefits to Delaware, such as: no state tax on corporate profits; stockholders do not have to appear on the public records; there is no state personal income tax; and there are no state franchise taxes. However, as with Delaware and most other states, companies formed in Nevada will have to pay fees and register in the state(s) in which it is intended that the company operate. Additionally, filing fees in Nevada are generally higher than in other states.
The best recommendation for smaller partnerships, limited liability companies or corporations primarily doing business in the state in which the owners, members or managers reside is to incorporate in the same state where the business operations take place; your home state. If you plan on significant rapid expansion into other states or are looking to find investors that wish to be anonymous it may make sense to look to incorporation outside your home state.