There May Be Benefits to Incorporating in Foreign States

One of the most common questions for entities wishing to incorporate is – “Where should I incorporate?” In fact, an entity can choose from any of the 50 states or the District of Columbia. There has been a great deal of hype about incorporating in certain states that happen to be well-known for having favorable laws for corporations. When an entity elects to incorporate outside its “home” state, the most common states in which the entities incorporate include Delaware and Nevada. However, even taking account of favorable laws in certain states, an entity’s “home” state (i.e., the state in which the corporation conducts a majority of its business) may often be the best state to incorporate.

Due in large part to their liberal incorporation laws and favorable tax policies, the most “incorporation friendly” states are Delaware and Nevada. And here’s why…
Should I incorporate in Delaware?

Delaware’s advantages as a place of incorporation range from the Delaware General Corporation Law to the flexibility built into the corporate formation process.

Incorporating in Delaware is generally less expensive than most other states. The initial charge for incorporating in Delaware can be as low as $89.00; the annual franchise tax can be as low as $65.00 in many cases; and the cost of continuing operations is low as well. There is no Delaware corporate income tax for corporations that are formed in Delaware so long as they do not transact business in Delaware.

Another benefit of Delaware incorporation is Delaware’s extensive and often easily interpretable law. Delaware has a separate Court of Chancery (a business court) that does not use juries, but instead utilizes merit-based (not elected) judges. Because there are no juries, decisions from the Chancery Court are issued as written opinions, and as such, Delaware has a large body of written legal precedent to rely upon.

Delaware law also allows for a version of the Limited Liability Company called a Serial LLC. Traditionally, an LLC is relatively simple to form and maintain. It is similar to the formation of a sole proprietorship or a partnership, but also provides a layer of protection (the corporate shield) as a limitation of liability. Unlike regular LLCs, Delaware’s “Serial” LLC allows different lines of business to be treated separately from each other from a liability standpoint.
Incorporate a Business or Form a Limited Liability Company in the State of Delaware.

Come tax time next year, you’ll be glad you did!

What about Nevada?
Nevada began with corporate statutes based on Delaware, and went further to establish a corporate structure that allows investors and owners of Nevada corporations to remain completely private. The Supreme Court of Nevada has consistently taken a very strong stand in the protection of corporate privacy, even when a corporation fails to adhere to basic corporate formalities.

Since the implementation of these privacy statutes in 1991, the number of new incorporations in Nevada has exploded. Unlike most other states, Nevada does not require corporate stockowners to disclose their information. In fact, the information is not kept on file with the state.

Additionally, to ensure privacy, Nevada allows its corporations to use bearer stock certificates, which make it virtually impossible to prove the ownership of a Nevada corporation. Accordingly, owners or investors utilizing bearer shares can have complete control and ownership while remaining anonymous.

Nevada also does not tax the income of its corporations or its state’s citizens. A Nevada corporation is also not subject to any other hidden taxes such as franchise taxes, capital stock taxes, or inventory taxes. Sales tax applies only to products sold within the state.
Incorporate a Business or Form a Limited Liability Company in the State of Nevada.
Come tax time next year, you’ll be glad you did!

Incorporating in Your Home State May be BEST!

For most small businesses, however, it may still be best to incorporate in the state where your business is based. Many legal and business professionals advise that you incorporate in the state in which your corporation intends to conduct the majority of its business, and, if you intend to do business in only one state, you should incorporate in that state.

If you incorporate in a state that is traditionally considered to be “corporation friendly,” but then conduct business outside your state of incorporation, you will likely have to qualify to do business in the state in which you are conducting business. Qualifying to do business outside your state of incorporation is called “foreign qualifying” or “foreign qualification.” Qualifying as a foreign corporation involves: (1) filing the appropriate foreign qualification documentation with the relevant Secretary of State; and (2) paying additional filing and maintenance fees. For some entities it may be worth the additional time and money associated with foreign qualification, but for many corporations, it simply creates an additional, unnecessary headache.

When determining the appropriate state of incorporation, you should undertake the following considerations:
1. What are the tax implications/benefits of incorporating outside your home state vs. incorporating inside your home state?
2. What are the additional costs of incorporating outside your home state and where, if anywhere, must you foreign qualify?
3. Are the corporate laws in one state favorable to the type of business entity you are forming, and how do they affect the obligations of the principals and/or shareholders of the corporation?

Even though some factors favor incorporating in the “friendly” states of Delaware or Nevada, it may be more expensive and more complicated to incorporate out of state. For this reason, it is important to consult with your attorney or accountant about the pros and cons of incorporating out of state before making your final decision.

Pungky Dwiasmoro Hiswardhani

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