Have you ever tried to figure out where to incorporate? If so, you know it’s difficult because there is a lot of confusing information about “preferred” states like Delaware and Nevada, yet other people say you should incorporate where you are located. So what do you do? Many people have found success by using an attorney. But there are a few things you should know before hire an attorney, in order to ensure you understand your choices and get the most value from his/her advice. This post will tell you what you need to know to make sure you select a state of incorporation that will let you successfully set up a company structure that meets your business needs.
If you’re looking for a state to incorporate in, start by thinking that the default (and the cheapest) choice is the state where your business is located, then consider if there is another state that is better.
The biggest downside to incorporating in a different state is that your company will be required to file for authority to do business in the state where the business is located, and most likely will also have to purchase a Certificate of Goodstanding or Certified Copy of the Articles of Incorporation (or Formation) from the Secretary of State where the company is incorporated. These additional filing and documents fees make the use of an alternative state substantially more expensive than incorporating at “home.”
The best to make this comparison is consider what your business will do in the near future, and see if another state that gives you more value for the higher cost. Ask yourself these questions:
- Will your business spread across several states? If your business has only one location, or multiple locations but will be located all in one state, then it will almost certainly be cheaper to form your company in that state. If your state is located across several states, the extra cost to be incorporated in Delaware will be minor compared to the benefits.
- Will your business be expanding across several states in the next few years? It may be worthwhile to be incorporate in a state like Delaware and register to do business in other states as you expand. As you grow across different states, the additional cost of being in Delaware is relatively small compared to the benefits.
- Are you planning to move with your business? If you will be moving from one location to another in the near future, then it might be worthwhile to incorporate in a state like Delaware and register to do business in the state or states where you are currently located. When you move, you can file a final tax return (if necessary) and file a surrender of authority to do business there, and register to do business in the new state. This technique will preserve your current company intact, with its accumulated loans, credit rating, contracts, accounting records and bank accounts.
- Will you be seeking venture capital or private equity, or plan to go public with an IPO (Initial Public Offering)? Professional investors prefer to work with companies incorporated in Delaware, because its laws are well-known and well-established, as well as pro-management. Delaware has a special Court of Chancery, which only hears business cases. Its court system is well-renowned for the professional ism of its judges, who are appointed based on their legal abilities instead of political popularity.
- Do you prefer to avoid states with cumbersome disclosure or other compliance laws? There are many states that impose a lot of administrative burdens on their companies. If this is an issue for you and your company, then incorporating in a different state may be worth the extra effort.
If you answered “yes” to any of these questions, then you should research your options and start asking a lot of questions about the relative benefits of incorporating in a different state.
If you are a foreign national who would like to start a business in the US, then you have additional considerations about choosing a location, including business visas and international tax.
Now that you know the main considerations of choosing a state of incorporation, you’re ready to start thinking about whether it is worth considering another state, or saving money and incorporating where you are doing business.