There’s one question I’m asked more often than any other when I’m counseling clients about business formation. What is the best state to incorporate a new business? There are the usual choices, of course. Delaware, Nevada, and Wyoming. These states all provide a number of benefits to the up and coming entrepreneur. Tax perks, rich history of corporate law, extra protections for corporations and the individuals who incorporate them.
But are those states really right for your business?
Any decision about where to form your new business entity obviously has to be made on a case by case basis. As an attorney, I’d be doing you a disservice to tell you that you absolutely must form your corporation or LLC in one particular state because, let’s face it, different business entities need different things and what works well for one company will be exactly the wrong thing for another.
What I can tell you, however, is to consider your home state as a frontrunner along with the usual top three choices. Our law firm is located in California—a state widely regarded to be, shall we say, less than friendly to small businesses. Except for tech startups. California is plenty friendly to those. In any event, California has high taxes, some foolish laws, and some courts have a penchant for trying to hold the officers and directors liable the debts of the business. Aside from all that—its a perfectly good place to incorporate your business.
So you’re a new business owner who wants to form a corporation. Say its a plumbing company. You live in California, you’re licensed in California, your employees all live and work exclusively in California, your shop is in California. You can see where this is going—you’re totally tied to California for your business. But you decide you want to incorporate your business in Delaware because a friend of a friend told you that’s the place to do it. Tax breaks, good law, whatever reason you have. If you decide you want to incorporate in Delaware, you’re going to have to pay for the incorporation there, file all of their paperwork, pay at least their minimum taxes, and so on. But, because you’re operating your business entirely in California, California is going to require you to register as a foreign corporation in California. Why? Because you’re transacting intrastate business here. And you’re going to have to pay for the registration here, file all of the paperwork, pay California’s taxes, and so on.
Sound like a good idea?
I didn’t think so.
That’s just one situation where it may be better to form your new corporate entity in the state where you’re actually conducting business. There are others, but that’s a topic for a one on one conversation with our clients. If you’re considering starting your own business and are looking for an attorney to help walk you through the process from start to finish, give us a call and we can put you on the right track—no matter what state you’re interested in.
Image courtesy: Robert S. Donovan
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