When it comes time to decide the state in which to incorporate a person has the choice of any of the 50 states or the District of Columbia. Since the laws governing corporations vary from state to state, there are some basic tenets that should be examined before making the decision on where to incorporate. The first question a new business owner might ask himself is, “Will we be doing business in one state, or several?” If business will be conducted primarily in one state, then incorporating that state may be the simplest and most logical choice. If there is more than one state in which business will be conducted, then the business should take into account that factors involved in incorporating in another state. Some of those factors include, but are not limited to:
- What are the corporate laws of the state regarding responsibilities and rights of directors, officers, and shareholders of the corporation?
- What are the corporate laws of the state with regard to the rights of creditors?
- What is the tax rate for the states being considered for incorporation?
- What is the difference in costs between incorporating in one state, as opposed to registering as a foreign corporation in that state?
Steve and his brother are starting a mobile detailing business for cars, RV’s, and boats. They are incorporating their business to take advantage of the liability protection that is offered by incorporation. They want the liability protection to shield their homes and private property from lawsuits that could arise from business activity. They will be spending a great deal of time traveling to and from appointments, as well as cleaning expensive vehicles. At this point in their business, they are only detailing vehicles in their home state of California. For Steve and his brother, incorporating in California is the logical choice. If they were starting a nation-wide detailing business that was going to offer services in a many states, then they might consider incorporating in a different state to reap the benefits of that state’s corporate law. Steve and his brother would want to take a look at what is offered by Delaware and Nevada with regard to incorporation.
Someone who has not looked into conducting business for themselves might ask, “Why Delaware?” Upon doing some research one will quickly find numerous reasons why more than half of the companies listed on the NYSE are incorporated in Delaware. Delaware has the Court of Chancery that has over 200 years of legal precedent in matters pertaining to corporate law, and is very business friendly. The judges found in the Court of Chancery specialize in corporate cases. They are appointed to their positions on merit and knowledge of corporate law, as opposed to election. Some of the other benefits to incorporating in Delaware are:
- No requirement for disclosure of names and addresses of the initial board of directors.
- The fees to incorporate are low.
- There is no state income tax on Delaware corporations not doing business in Delaware.
- Delaware has no sales or personal property tax.
- A business office is not needed. Only a registered agent is required.
- An individual can act as the officer, director, and shareholder of a corporation.
- Shareholders can make written decisions in lieu of formal face-to-face meetings.
- Different types of businesses can be conducted under one corporate roof.
- Expedited incorporation processing. Delaware even has the option getting a business incorporated in as little as 1 hour.
Nevada is has become an extremely popular state in which to incorporated due to the benefits it offers to business. In addition to the strong liability and asset protection that is offered by incorporating in Nevada, there are other benefits. Nevada does not impose franchise taxes or corporate income tax. There is no personal income tax, enhanced privacy of ownership, the speed at which a corporation can be formed, tax savings, and low startup cost. Nevada has taken the basics of what has been a successful recipe for Delaware, and taken them a bit further. There has yet to be a case in Nevada where the corporate veil has been pierced, except for cases of intentional fraud. A summary of reasons that one many be drawn to Nevada for incorporation are:
- Strong liability protection for directors and officers acting on the behalf of the corporation.
- Low startup and annual costs
- Tax savings. A Nevada corporation conducting business in Nevada is state income tax free.
- Privacy. Nevada corporation stockholders are not on public record.
- The state of Nevada did not sign an information sharing agreement with the IRS.
- Nevada is the only state that allows for “Bearer Shares” to be issued. These shares are owned by whoever has them at the moment, thus allowing a trusted friend or family member to hold the shares in times of peril.
- Minimal reporting and disclosure requirements.
- The directors don’t need to be stockholders.
- Nevada corporations have the ability to issue stock to raise capital, for services rendered, personal property, and real estate. The directors have the ability to determine the value in these instances, and their decision is binding.
While there are a multitude of options and choices available when it comes time to choose a state in which to incorporate, the fact that incorporation gives the company liability and asset protection when properly operated is tantamount. Keeping your assets and property out of harms way when trying to live the American dream and owning a business is a major priority. After dealing with the most important decisions, choosing a state to incorporate in will boil down to what tax advantages, lawsuit protection, flexibility of operation, degree of privacy, and organizational structure the business requires, and which state best meets those needs.