Where Should You Incorporate Your Startup Company?

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 generally should incorporate in that state.

Other Considerations

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 corporation laws of the state with regard to the rights and responsibilities of corporate shareholders, officer, and directors?
• What are the corporation 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.

For example, if you are a California business only doing business in California, there will be extra costs and paperwork to be a Delaware corporation, and you should most likely choose to be a California corporation. 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.

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 offices.

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.