Which is the best state to incorporate in?
What are the benefits of incorporating in California, Nevada and Delaware? How will this affect the entrepreneur? What kind of leverage does this provide to the small business? Thank you.
Unless you have shareholders, venture capital and are a publicly traded company worth a few million, you really don't get to take advantage of the benefits of incorporating in Delaware.
Yes, it can be easier to register in Delaware, BUT the filing fees are usually more expensive and you will still have to register/qualify in your home state(or the state you are doing business in) as a foreign entity, and you still have to pay taxes in your home state too. If you don't register in your home state also, you leave your assets exposed and open yourself to various penalties. Plus you will have to pay for a registered agent, maintain two registrations and you will also have to follow laws in two states - your home state and Delaware. There goes the time and money you thought you were saving.
Yes, Delaware has a very developed, unique, corporate-friendly legal system (The Court of Chancery). Cases are heard by a judge (no jury) and rulings are based on previous written decisions and they tend to side with management. Considering that 99% of cases against small businesses are settled (or thrown out) before trial, it is doubtful you will even see a courtroom or benefit from this.
Yes, Delaware allows for anonymity, so you don't have to make your officers and board members public, however the IRS is working to change this and your home state probably doesn't have the same option for anonymity. Since you have to register in your home state anyway, there is no benefit there.
Yes, Delaware residents pay no sales tax. Unless you live there, this will not benefit you at all.
If your company grows, you can always move your registration to DE or NV or wherever, but as a small business, LLC, etc., it's best to incorporate in your own state.
I've worked for a number of companies who were "headquartered" in California but incorporated in Delaware. I'm not an accountant or a lawyer but close to 50% of Fortune 500s are incorporated in Delaware. There are no definitive tax benefits that I'm aware of; however, Delaware has a business friendly court system. Here's a quick overview of Delaware's advantages - http://www.companiesinc.com/incorporate/delaware.asp
Remember that where you are incorporated will impact where you can be served legal process. So, choose somewhere that you have a connection to. Better to ask, what states should I avoid? Also where you are resident is significant.
Here are some pros and cons of each state:
- just like any other state from a legal perspective
- need to pay state taxes which can be very high
- no state taxes
- just like any other state from a legal perspective but somewhat more efficient than California but less efficient than Delaware
- maintenance cost of keeping LLC active around $250 to $500 annually
- taxes lower than California but higher than Nevada
- very efficient from a legal perspective if you actually go to court
Other things to keep in mind:
1) If you incorporate an LLC in Nevada and live in California you still need to pay taxes in California on personal income if you consolidate income onto your personal taxes (Schedule K1). Also if you do not really have operations in Nevada but actually have operations in say California you will still need to pay taxes in California. Nevada LLC does not protect you from taxes in California. This is a big misunderstanding startups have about Nevada LLCs
2) If you have legal complications that can happen then Delaware will be a very efficient place to resolve disputes. Will be cheaper on attorney fees I mean. However this would not be ideal if you have a lawsuit in California for example. If someone sues you in California you will have to hire a local attorney in California who will either hire another representative in Delaware or who will have the right clearance to practice law in Delaware. Delaware corporations have advantages for example the Operating Agreement is going to be a very standard one.
1) If your business genuinely operates in California and you are a small business then Nevada and Delaware are merely distractions. Bite the tax bullet and incorporate in California
2) If you have significant operations in Nevada go for a Nevada LLC
3) If you have complicated legal transactions with clients, competitors suing you, or expect M&A in the future then consider Delaware corporation if the benefit outweighs the tax savings from a Nevada LLC.
There are a number of factors to consider. The costs of taxes, licensing, rent, etc. are all part of the picture. Get advice from a number of experts in different fields.
Hope it turns out great!
Delaware. It's inexpensive, and you hire a proxy for your mail address (it's done all the time, see The Incorporating Company's website...I'm not shilling for them, but have had good experience with their services). Delaware has virtually no maintenance for the LLC's. I can't compare them to Nevada or Cali, never having registered a business there.
Delaware or Nevada. Nevada - there's no state income tax. I know from personal experience that it's cheaper to incoporate in Nevada. I know that Deleware has a lot companies who are "headquartered" there and I have heard that it has a business friendly state government.
I consulted with many companies in California and most of them are using Wyoming
here's a quick overview...Wyoming state fees are less than most other states. Wyoming has no business license fees or officer filing fees. This means we can deliver a quality company package for much less than you would pay in Nevada or Delaware. And, your Wyoming state renewal fee is, in most cases, $50, that is 84% less than what you will pay in Nevada. Wyoming is one of the most cost effective states to incorporate in and also to maintain in the following years.
The first LLC statutes in the United States were instituted in Wyoming in 1977 and changed in 2010 to stay current with the times. Since Wyoming has had limited liability companies available longer than any other state and has the strongest laws protecting members and managers of an LLC, we feel it is the state of choice for establishing LLC’s.
I'm not affiliated with this company but there is good information on the website http://wyomingcompany.com
All the best in your new venture