Should you register a company in your home state or a business friendly state like Nevada?


2

That are the pros and cons of creating your corporation in the state where you're located vs a different state like Nevada or Delaware? Which would you recommend?

Incorporation Legal Corporate Structure

asked Mar 12 '14 at 02:26
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Gloria West
50 points

2 Answers


2

I'm no lawyer and I certainly don't live in Nevada but here's my personal opinion: register the company in the state in which you live. I'm assuming you don't live in Nevada or Delaware currently.

  • Your home town will most likely be your nexus anyhow, depending on what kind of product or service you sell. For example, it's easy to get customers in your local city/state first because of their proximity. Yes, that includes even those who have web based businesses (i.e. no brick/mortar presence).
  • At some point you will need expert tax, legal and accounting advice (and HR and insurance in the case where two founders have keyman insurance). It's just so much easier when you can meet these folks in person.
  • Since you are operate in a state other than Nevada or Delaware, I think it is just good mojo to pay your taxes in the state in which you operate. We all hear the story of the guy who operated in a state, sold his business for tens of millions, but moved to Texas to avoid state income tax. I think that's really unfortunate that people think and operate that way. It's also called stealing.
  • You'll most likely need the help of the chamber of commerce at some point in your state, especially when starting out. Also, there are programs that give tax credits and other help to small businesses. They aren't going to do that if you're incorporated in another state (although you could drive to Nevada and visit their chamber of commerce I guess).
  • It can affect how you file and what you have to do when raising capital. It can also result in duplicative filing fees and paperwork for annual reports (i.e. file in the state you operate in as well as where you are incorporated).
  • Things get a little wonky with workman's comp and other every day background items when you have employees working in another state. I'm also not sure how this would affect non-compete's, etc.
  • I know Delaware has great laws for corporations, but I believe much of that credit goes towards larger corporations. Besides, you can get sued anywhere in the U.S. these days.

Overall looking back at what I just wrote you can obviously see I'm not a big fan. I think it introduces unneeded complexity and potential future issues that may bite you -- all at a time when you should be focused on what counts: building your business and its value, not to mention making customers raving fans. The last thing you want is unnecessary distractions.

Of course if you move to Nevada or Delaware, well, that's a different story. Keep in mind that my experience is with running an NC based LLC (limited liability corporation) and coming fromm the background of raising a significant amount of capital from angel investors (not VC).

answered Mar 12 '14 at 15:22
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Chris
337 points

2

I spoke to a lawyer that works with startups about this during a class and here is a summary:

- If you plan to raise funds from investors, they do prefer DE-based corporations to many other states due to legal advantages. Not all states are equally unfavorable, so do consult a lawyer who takes care of funding paperwork. I was told NY is not liked by investors.

- If you know you are not raising funds anytime soon, but don't want to close that door completely, there are ways to move your corporation later so it's not set in stone (e.g. open a new corp and acquire the old one)

- If you plan to remain small and not have employees anytime soon, incorporating locally will simplify legal/accounting for you. Everything Chris said in his answer applies.

Whatever you do, make sure to file for S-corp status when you form a corporation - you have 2.5 months from formation date to do this. Great tax benefits with S-corp. If you are considering LLC route, it's hard to change from LLC to a corporation I believe (consult a lawyer). Also, research and compare tax implications for LLC and S-corp.

TLDR: Only investors care greatly about incorporation states and they do prefer DE, but if funding isn't an option being considered keeping it local simplifies many things. Of course always consult a lawyer or accountant :-)

answered Mar 12 '14 at 15:54
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Webbie
2,835 points
  • By investors preferring Delaware, you might be thinking VC's. Angels aren't really going to care one way or another (I'm speaking in general - I'm sure there are angels somewhere who do care) and they would probably prefer the tax credits available in their home states. For example, NC offers a credit up to the first $50K of your investment for accredited investors, provided the business qualifies. LLC's can be converted into corporations and, in fact, this is why you pick an LLC so that an acquirer or a larger investor can convert you into a C-corp later. – Chris 5 years ago
  • All that being said, you would be really wise to consult the professionals. It would be money well spent upfront. – Chris 5 years ago
  • Agree with @Chris - must consult a professional. – Webbie 5 years ago

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