You've decided to incorporate your business.
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That's great . . . but the next decision you make might be just as important as the decision to incorporate in the first place. Where will you incorporate your business?
A lot of small businesses simply choose to incorporate in the state where they are currently headquartered. There's nothing wrong that and, in fact, for some business owners that is the right decision. But for other business owners – especially those who do business in multiple states or have plans to eventually go public with their corporation – the option of incorporating in a different state can be very attractive.
It isn't uncommon for businesses to incorporate in a state that is different from the one in which they do business. Although you will need to file the appropriate forms and adhere to relevant state laws, there can be several advantages to out of state incorporations.
What's the Difference?
Depending on your circumstances, there may be a lot of reasons for pursuing incorporation in another state. Businesses frequently incorporate in a different state to leverage the benefits of lower tax rates. Corporations pay tax in the state where they are incorporated, so it's possible that your location could save you a bundle at tax time. In addition to taxes, states normally require corporations to pay annual registration fees and other expenses. However, some states minimize their fees to attract the interest of out-of-state corporations.
But before you select a state for your incorporation, there are also a few non-financial issues to consider. States have the freedom to establish their own rules for handling corporate insolvency. If your corporation encounters hard times, you need to know how you will be treated under state law. Additionally, if you incorporate in a state where your company does not regularly conduct business, your company will automatically be vulnerable to litigation in the state of your incorporation.
Delaware has a reputation for being a likely candidate for out-of-state incorporation. It's legislature is known for being corporate-friendly, so much so that almost half of all corporations listed on the New York Stock Exchange are incorporated in Delaware.
The benefits you could expect to receive by incorporating in Delaware include: A streamlined incorporation process, low incorporation fees, a separate court system for businesses, minimal corporate office requirements, and no corporate income tax for out-of-state corporations that do not do business in Delaware. Although Delaware does require out-of-state corporations to have an agent located in the state, it's easy to see why so many corporations choose Delaware for incorporation.
In recent years, Nevada has become another attractive option for incorporation. It has many of the same benefits as Delaware, but it also gives shareholders the ability to remain anonymous. Unlike many other states, Nevada corporations are not required to publish the names of their shareholders in public documents. Under the right circumstances, Nevada corporations can leverage shareholder confidentiality to tap into a publicity-averse investor base.