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How To Choose Which State To Organize Your Business In

Don Hankins

Once you have selected the type of business entity you want to form, the second question you might be faced with is what state is the best in which to organize. Choosing to organize your business in the state where your company is physically located is called home state incorporation. If you choose to organize in a foreign state (meaning a state where you do not have a physical presence) you will still nonetheless be required to register to transact business in your home state and qualify as a foreign entity doing business in the state.

There are various factors which should be reviewed in determining which state may be the best for your entity.

· Where is your principal office located?

· Consider each state’s taxation requirements for both a home state incorporation and a foreign-qualified entity. Does the state have a minimum tax or a franchise tax? Is there a state income tax on corporations and LLC’s? What can be deceiving to the new business owner is the lure of organizing in a foreign state with very low or no corporate income tax. Since the foreign entity will need to also register as a foreign entity transacting business in its home state, it then subjects the entity to taxes and annual report fees from both the state of incorporation and the qualifying state. In most cases, registering as a "foreign entity" will subject you to all the same taxes and fees as a home-state entity.

· What is the state’s regulatory climate for the type of business you are looking to form?

· What is the state’s policy on privacy for business entity members, managers, officers and directors? How important is keeping the names of the business’ owners and directors private?

· What state offers the best body of law for your particular type of business? For instance some states might offer more protection for consumers than business owners, while some states like Delaware are more pro-business.

· Prepare a spreadsheet that analyzes the entity’s projected income taxes over a 2 – 3 year period. This analysis is more important for entities that may organize outside their home state, although registered as foreign entities as thus required to pay home-state income taxes.

It is often said that Nevada and Delaware are the two most advantageous states for small business owners to organize a business. Each of these states offers advantages that more likely than not are not available in your home state. Here is a list of the some of the key advantages of organizing in each of these states:

Nevada –

Offers very high levels of protection from personal liability for its corporate officers. Nevada Corporation Code allows for the indemnification of all officers, directors, employees, stockholders, or agents of a corporation for all actions that they take on behalf of the corporation where there was reasonable cause to believe the actions were legal. This indemnification can include any and all civil, criminal and administrative actions. Nevada has abolished joint and several liability, and Nevada law requires that the court assign a percentage of fault or liability to each defendant. Nevada has no state corporate income tax and imposes no fees on corporate shares. There is no personal income tax or any franchise tax for corporations or LLCs. No residency requirement for owners, directors, shareholders, members and officers and all names and address and not made part of the public record, thus affording maximum privacy.

Delaware –

Delaware’s body of law is more business-oriented and the Delaware Court of Chancery system is designed to handle complex legal litigation. The names and address of all shareholders and directors are not made part of the public record, thus affording the maximum level of privacy. No minimal capital investment is required. There is no sales tax. Delaware’s business law is one of the most flexible in the country. For corporations, there is no state corporate income tax for companies that are formed in Delaware but do not transact business there, although there is a franchise tax. There is no personal income tax for non-residents. There is no residency requirement for shareholders, directors and officers of a corporation or members or managers of an LLC. Stock shares owned by persons outside Delaware are not subject to Delaware taxes. The state’s court use a judge based system, not juries. General corporate laws that were designed to allow maximum flexibility to corporate structures and operations. Great flexibility in the transfer of corporate stock. A corporation may issue stock for cash, property and services and its directors can determine the worth or value of the stock. Protection for officers and directors from personal liability against any lawsuits or business debts arising from the operation of the corporation or by actions committed on behalf of the corporation.

Wyoming –

· Recently, Wyoming has become an increasing favorite place for new companies to organize. It offers many of the same benefits as Nevada and its filing and annual fees are lower.

Conclusion –

For the majority of small businesses, incorporating or forming an LLC in your home state is usually the easiest and least expensive option. For the small business owner, it is advisable by most experts that it is best to incorporate in the state in which you will be conducting the majority of your business. In most cases, that is the state in which you reside. So if you are a small business, either running your business from home or an office location within the state in which you reside, the benefits that may be derived from organizing outside of your home state, might not in the end be worth the effort. However, if your top priority is maintaining the privacy of all owners, shareholders, officers, directors, and members so that their names and addresses are not made part of the public record, then organizing in one of the three states discussed above may be your best choice.

 
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