By Maryann Lawrence, Startup Rep, Direct Incorporation
There’s a lot of talk about the best place to incorporate or form your LLC. Should you incorporate in a “tax haven” state with no individual income tax, such as Florida or Texas? Should you follow large publicly traded corporations and incorporate in Delaware? Or, should you consider the recent trend and incorporate in Nevada or Wyoming because you’ve read that you can remain anonymous and avoid paying taxes?
Well, for a small business, the answer is usually none of the above. It is usually makes the most sense to incorporate in your home state, where your business is domiciled and operates. This is typically the answer for a few basic reasons.
First, most small businesses will incorporate or organize as an S-Corp or LLC, which are pass thru entities. As an S-Corp or LLC, you won’t be subject to corporate tax generally, just individual income tax. As such, it won’t matter if you incorporate in a state with a high corporate tax rate, moderate tax rate, or no corporate tax at all because you won’t be subject to it. Additionally, incorporating in another state will not affect the state in which you’re subject to individual income tax. For example, if your business is in California and you are subject to California income tax, then incorporating in Delaware won’t change that fact. Hopefully you are in state with no individual income tax, such as Texas or Florida and not a state with a high tax rate, such as California, New York or Massachusetts.
Secondly, if you incorporate in another state, your fees will add up quickly. You will very likely be required to file as a foreign business entity in your home state. Foreign entity fees are usually higher than incorporating, so you will be doubling up on fees, or worse. You will also be required to file annual reports in both states and hire an outside service to be your registered agent (assuming you do not have a physical address in that particular state).
Finally, the stated benefits of incorporating a small company in Delaware, Nevada or Wyoming are often exaggerated or misunderstood. Though a plurality of all companies incorporate in Delaware, the benefits are generally geared towards larger corporations and publicly traded corporations. For example, Delaware corporate law benefits the entity in the case of shareholder derivative suits and also provides anti takeover protection, circumstances which are virtually irrelevant to a small, closely held company. As for the Nevada and Wyoming options, there is no appreciable tax benefit for an S-Corp or LLC that doesn’t operate within the state (see above). What about anonymity? In Nevada, you can take certain measures, such as hiring a “nominee director” to avoid putting the actual directors on state public documents- usually around $600 per director. However, remember that most of these companies will also be required to file as a foreign entity back home. As foreign entity, you will be required to provide the actual directors’ names and addresses.
In balance, do the benefits of incorporating in another state outweigh the disadvantages? For most small companies, the answer is probably no. Most save time and money by incorporating in your home state. Please consult an accountant and/or attorney for advice on your specific situation.
Do you have questions about incorporating your business? Please leave a comment below and I will try to answer them. Thanks! – Maryann
