Where Should You Incorporate
A glance at corporate-friendly states.
The laws governing corporations vary from state-to-state. As a result, a
common question prior to incorporation is 'Where should I
incorporate?' The simple answer for the great majority of companies is
that you should incorporate in the state in which your corporation intends to
conduct the majority of its business. If you intend to do business in only one
state, you should incorporate in that state.
If you feel you might be interested in
incorporating in a state other than the one in which your corporation will
conduct the majority of its business, you will want to consider the following
issues:
- What is the tax rate for the state(s) you are considering for incorporation?
- What are the comparative costs of incorporation in a particular state versus the costs of
registering to do business as a foreign corporation in that state?
- What are the corporate laws
of the state with regard to the rights and responsibilities of corporate
shareholders, officer and directors?
- What are the corporate laws
of the state regarding the rights of creditors?
When corporation laws were first being enacted by the states, several states
purposely enacted laws to attract businesses to incorporate in their states
even though the corporations would do business in other states. The first
states in this group were New Jersey,
Delaware, Maine,
Arizona and a few others. Today,
Delaware is the clear winner.
Close to one-half of all corporations listed on the New York Stock Exchange are
incorporated in Delaware even
though most of those corporations have their principal places of business
elsewhere.
If you incorporate in one state and end up conducting most of your business
in a different state, you will have to qualify to do business in that other
state, which will involve more fees and costs, more filing requirements and
more paperwork. If your business actually conducts business in more than one
state, or if it is a large, publicly held corporation, it can be worth the
additional cost and time to incorporate in one state but operate in another
state or states.
A corporation doing business in a state other than its state of
incorporation is considered a foreign corporation.
Delaware
According to the Delaware Secretary of State, there are several reasons that
so many companies choose to incorporate in Delaware:
- The Delaware General
Corporation Law is one of the most advanced and flexible corporation
statutes in the nation;
- Delaware
courts and, the Court of Chancery in particular, have over 200 years of legal
precedent as makers of corporation law;
- The state legislature takes
its role seriously in keeping the corporation statute and other business
laws current; and
- The office of the Secretary
of State operates like a business rather than a government bureaucracy
with modern systems and a customer-oriented staff.
The Delaware Court of Chancery has an excellent reputation and is
predominantly a business law court. Its judges have a great deal of experience
with business disputes. Other states have created similar specialty courts, but
none have achieved quite the reputation of the Delaware Court of Chancery.
Highlights of benefits to incorporating in Delaware
include:
- Low cost incorporation fees;
- No state corporation income
tax for Delaware
corporations not operating in Delaware;
- No name or address disclosure
requirement for the initial board of directors;
- One person may hold all
corporate offices;
- The corporation must have a
registered agent in Delaware,
but not a business office; and
- Claims relating to the
corporation will be heard by the Delaware Court of Chancery.
It makes sense for a large, publicly held corporation to incorporate in Delaware.
It also may make sense to incorporate in Delaware
if your corporation will conduct business in more than one state. It does not,
however, generally make sense for a small, privately held corporation that will
only conduct business in another state to incorporate in Delaware.
If you are only doing business in one state, there will be extra costs and
paperwork to be a Delaware
corporation, and you should most likely choose to be a corporation in your home
state.
Nevada
Nevada is another state
attempting to attract businesses to incorporate there by enacting
corporate-friendly laws. Some of the benefits of incorporating in Nevada
include:
- Anonymity for stockholders by
allowing stockholders to avoid having their names becoming part of the
public record;
- Stockholders, directors and
officers may be nonresidents of Nevada;
- No state annual franchise
tax;
- No state corporate tax on
profits; and
- One person may hold all
corporate officers.
But again, if you are only doing business in one state such as California,
it will generally make more sense to be a California
corporation.
Secretary of State
The Secretary of State is the official who is responsible for handling each
state's business filings. The office of the Secretary of State for each state
is where you file the documents and paperwork, and pay fees to create, manage,
and dissolve a corporation. The best way to obtain the most up-to-date filing
and fee information regarding your corporation is to contact your state's
Secretary of State, first by visiting your state's Secretary of State website.
All states provide access to corporate filing information in this manner.