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Wednesday, August 12, 2015

Where to Incorporate Your Small Business.

Should you incorporate your business in your home state? What about Delaware or Nevada, long known as havens for corporate entities? This decision should not be taken lightly because incorporating your business in a particular state will determine, to a significant extent, the laws that will apply to your business. It will also have tax implications.

Often times, the best choice for corporate jurisdiction is the home state where your business is located.  There are several reasons for this. First, filing in a different state will not absolve you of the obligation to pay corporate taxes and comply with filing requirements in the state where your corporation has its operations. For example, if the corporation is located in New Jersey, it will be subject to New Jersey fees and taxes, either as a domestic New Jersey Corporation or as a “foreign corporation” doing business in New Jersey. Additionally, if you are incorporated in a state other than where you are physically located, you will likely incur another set of filing fees and expenses for a registered agent who is physically located in the state of incorporation. For example, if you are incorporated in Delaware but are physically located in New Jersey, you will be subject to the fees and taxes of both states.

Many companies opt to incorporate in the State of Delaware, even though very few of them are actually based there. Approximately 60% of Fortune 500 companies are incorporated in Delaware. These major companies do so because Delaware’s corporate laws are generally favorable to business and management.  Delaware also has a special Court of Chancery that hears only business law cases. These courts afford companies a degree of consistency and predictability in rulings, which may or may not be found in other states.

Many entrepreneurs also consider the State of Nevada. Many companies are attracted to Nevada’s pro-business laws and favorable tax policy. Nevada also has a special business court, similar to Delaware’s Court of Chancery, although it is not as well established and lacks the breadth of case law that Delaware has.

If your company is engaged in risky or litigious business, then Delaware, Nevada or Wyoming may provide some additional liability protection.  For businesses that are essentially holding companies or otherwise lack operations as a traditional business would, forming a company in these states can also make a lot of sense since the business would not be subject to the laws of multiple states. As in all business-related matters, you should spend some quality time with your attorney and accountant before you decide where to incorporate your small business.

This will be the last blog posting for the summer as I give my keyboard a rest for a few weeks. Have a great rest of the summer and see you in September.
 


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